Illinois has made it legal to fully insure no-down-payment mortgages - lifting the last major regulatory barrier to doing so.
The state's Department of Insurance on May 4 issued an "emergency amendment" raising to 100% from 97% the maximum loan-to-value ratio of a mortgage that a private mortgage insurer licensed in Illinois may insure.
The day the department issued its amendment, the largest mortgage insurer, Mortgage Guaranty Insurance Corp. of Milwaukee, said it would begin to insure loans for 100% of a home's value.
MGIC waited for the green light from Illinois because the state has what amounts to extraterritorial authority. If an insurer does something in another state that is illegal in Illinois, it can be barred from selling insurance there.
New York and California have similar powers; New York legalized 100% loan-to-value insurance a year ago, and California did the same in January.
Previously, companies had to find creative ways to offer insurance for zero-down loans. Some companies offered the coverage through subsidiaries; others found third parties to take some of the risk.
Mortgage insurance executives say these programs will make homeownership feasible for people who don't have enough savings to put 3% down. Some observers worry about the extra risk they are taking on.
"I'm always suspicious about someone who's got no equity in their home at all," said David M. Graifman, an analyst at Keefe, Bruyette & Woods Inc. "They have no incentive to stay there any more than a renter does."
Mr. Graifman was so concerned about MGIC's announcement about insuring 100% loans that he sent a research note to clients expressing his skepticism. After publishing the note, he said, he spoke to MGIC officials, who assuaged his fears somewhat by pointing that the 100% program is available only to people with sterling credit.
In order to qualify for the insurance without putting any cash in the deal, a borrower must have a minimum Fair, Issac & Co. credit score of 700, said David Greco, vice president of marketing at MGIC. "Somebody with a Fico score north of 700 has a demonstrated history of paying their bills," he said.
Borrowers with scores of 660 to 699 can still get coverage from MGIC for a 100% loan-to-value mortgage, but they must pay cash equivalent to 3% of the home's value in closing costs, Mr. Greco said. Those with Fico scores below 660 do not qualify for the 100%-financing program.
It is also reassuring, Mr. Graifman said, that the 100% loan-to-value loans will make up only a small piece of MGIC's business - at most 1% to 2%.
"We expect this will be a very manageable piece of our overall risk portfolio," Mr. Greco said.
The amendment is effective for 180 days; a permanent amendment will be in place before that period is over, said Arnold Dutcher, chief deputy at the department.
