The Department of Housing and Urban Development has given its blessing to a new twist on mortgage insurance that could yield more tax benefits to borrowers.
In a letter to Rep. Rick Lazio, R-N.Y., HUD said lenders could let customers roll their mortgage insurance premiums into their loan payments - and could price the loans to reflect the costs - provided they make clear disclosures about how the product works.
The move could give a big boost to lender-paid mortgage insurance, pioneered by Amerin Corp. and offered by only a handful of lenders. Just about $1 billion of the $120 billion of mortgage insurance written in 1995 was lender-paid.
With the HUD pronouncement, "you'll find more banks and lenders interested in offering the product," said Chicago Corp. mortgage analyst Steven Schwartz.
In lender-paid insurance, the cost is included in interest payments, which can enhance the tax break to borrowers. Most mortgage insurance is paid for separately by the borrower and is not tax-deductible.
A handful of companies - among them Countrywide Home Loans, Pasadena, Calif. - have been offering Amerin's policies and have found an appetite among consumers. But growth has been stymied by lingering questions over how to disclose conditions, including a prohibition against canceling the policy, and whether the product violates fair-lending requirements.
The HUD letter, written by Nicolas P. Retsinas, assistant secretary for housing, stated that lender-paid insurance poses no violation of the Real Estate Settlement Procedures Act. He also wrote that Amerin had set a high standard for disclosure and other mortgage insurers should be expected to do likewise.
Nine companies offer mortgage insurance, a product that protects lenders against losses when borrowers default. An industry yardstick requires a mortgage insurance policy for anyone putting down less than 20% of a home's purchase price.
While industrywide figures are hard to come by, lenders estimate that 50% to 60% of their borrowers must carry some form of mortgage insurance.
Most lenders have remained true to traditional mortgage insurance. Countrywide has been in the vanguard of accepting lender-paid products. On average, 40% of its borrowers select the new type of insurance, said Marshall Gates, a Countrywide managing director.
The product can save customers a few thousand dollars over the life of a loan. It also appeals to lenders because the higher interest rate boosts their income, said Gerald Friedman, Amerin's chairman.
Chicago-based Amerin is credited with being the most ambitious marketer of lender-paid insurance, maintaining its marketing push while some legislators and rivals were criticizing the product.
The HUD letter is seen as something of a vindication. It shows that the product has the potential to be an important tool for the mortgage industry, Mr. Friedman said.
The product is especially appealing for first-time homebuyers and those who expect to pay off their loans early, Mr. Friedman said.
The HUD letter has already encouraged at least one other insurer, GE Capital Mortgage Insurance Corp., to begin offering lender-paid insurance. A spokesman said it would "very quickly" roll out a product.
Other companies were less committed. "We're encouraged HUD has put out a pronouncement," said Geoffrey F. Cooper, spokesman for MGIC Investment Corp., a mortgage insurer based in Milwaukee. "It's too soon to say," he said, whether MGIC would mount a broad marketing program.
Such reluctance stems from lingering questions about the product.
While Mr. Friedman maintained that the policy's cost is tax-deductible because it is rolled into the interest rate, Amerin has not gotten a formal ruling from the Internal Revenue Service. In addition, the cost of lender- paid insurance raises a loan's interest rate about half a percentage point, a cost some customers may object to despite the potential long-term savings.