The nation's largest mortgage insurer, Mortgage Guaranty Insurance Corp., has started insuring loans to borrowers with less than pristine credit.
The Milwaukee company is the latest to respond to demand among lenders who want to expand beyond the traditional borrower base.
MGIC created its own underwriting standards for the A-minus product. For A-rated borrowers MGIC defers to lenders' underwriting standards. Unlike conventional mortgages, A-minus loans have no standard documentation, noted David Greco, vice president for marketing at MGIC.
Indeed, despite a surge in lending outside the traditional parameters in the past year, there is no consensus on what exactly constitutes an A-minus loan.
Commonwealth Mortgage Assurance Corp. has been insuring A-minus loans since 1994, said chief executive officer Frank Filipps. A-minus borrowers have had some delinquency problems in recent years, but not enough to designate them as B and C, or subprime.
Mortgage insurers cover default risk on low-down-payment loans. Fannie Mae and Freddie Mac will not buy loans with down payments less than 20%. But recently the insurers have begun to insure loans that Freddie and Fannie avoid for other reasons.
Their motivation is to allow lenders who traditionally make conventional loans to enter nonconforming markets. The insurers say their new products will make the loans easier to sell in the secondary market, to portfolio lenders, private investors, or perhaps Fannie and Freddie .
MGIC also announced that it would begin insuring second mortgages, allowing homeowners to borrow against as much as 100% of the value of their property.
Unlike first mortgages, where MGIC usually covers 25% to 30%, MGIC will cover 110% of the unpaid principal balance of any second mortgage that defaults. The extra 10% accounts for legal and foreclosure expenses.
Lenders said the insurance will make a difference in the market for nonconforming loans.
"It adds a lot of efficiency, and the availability of low- down- payment financing to a group for whom it was generally difficult to find, if not unavailable," said Peter Paul, chief executive officer of Headlands Mortgage, Larkspur, Calif. MGIC began testing its A-minus product with Headlands last fall.
United Guaranty Corp. is committed to writing insurance on $1 billion of A-minus loans over the next year, said Mark Amacher, a senior vice president at the company. The company also has a new program that insures loans up to 103% loan-to-value for A- quality borrowers.
PMI Mortgage Insurance Co. is working on an A-minus program that will be available in the fourth quarter, according to David Katkov, vice president of marketing.
Now is the natural time in the credit cycle for the mortgage insurance companies to take these excursions into the subprime world, said Edwin Ciskowski, analyst at SunTrust Equitable Securities.
"Times are so good that the companies can stretch again to create new products," Mr. Ciskowski said. "If times were bad we wouldn't see these products."
But the companies have become much better at guarding against credit risk than in the 1980s, when the industry suffered bankruptcies and acquisitions, he said.
Indeed, many of the insurers use sophisticated risk-based pricing models that allow them to price insurance precisely. Through the use of such models, CMAC has found that 10% to 15% of its A-minus customers qualify for the same insurance rates as regular A customers, Mr. Filipps said.
For some loans, United Guaranty will charge the same rates as it does for A- quality borrowers, Mr. Amacher said. For others it will charge 144 basis points more, and there are many gradations in between.
Mortgage insurers have generally charged similar if not identical rates on conventional loans for years, Mr. Paul said. In these budding areas of business, "they may finally decide they can compete on rate and the amount of risk they choose to have an appetite for. The logical way to expand their business is to really act like a claims-paying insurer."