As of Jan. 1, your members looking to buy new homes can consider an old financing travel buddy: private mortgage insurance (PMI). Thanks to the just-passed “Tax Relief and Health Care Act of 2006,” mortgage insurance is now tax deductible. And while there’s no free ride, it might be a better option than piggyback loans, also known as 80-10-10s, or when a second mortgage is “piggybacked” onto the original loan.
Reading the road signs
There are some caveats: For the full tax benefit, household average annual gross income must be $100,000 or less. But a family typically needs to make more than $50,000/year to outweigh the standard 2007 deduction of $10,700 for couples. Given the 2005 median U.S. income of $46,326, many borrowers are eliminated up front.
Further, qualifying loans must have been funded after Dec. 31, 2006. And unless extended, the law expires at the end of 2007. But analysts agree the new law is likely to be renewed and eventually its guidelines could be expanded to qualify more borrowers.
Homebuyers take out piggybacks to pay all or most of their down payments. In recent years, most borrowers have preferred piggybacks over mortgage insurance. Piggybacks were fairly low cost and tax deductible – a good choice for members who couldn’t pay 20% down.
But, since hitting their peak in early 2005, these loans have fallen from favor because of rising short-term interest rates. Now, the tax break on mortgage insurance means borrowers must weigh the higher interest rate of a piggyback loan against the cost of carrying insurance on a larger first mortgage.
Mapping the best deal
Today, the median home price in the United States is approximately $221,000. This would require a down-payment of $44,200 for a conventional loan without mortgage insurance. That down-payment is a problem for many borrowers with piggybacks running at over 8%. Additionally, new regulatory guidelines could make it tougher for some homebuyers to obtain piggybacks – especially if combined with risky “exotic” mortgages. A recent Standard & Poor’s study noted that first liens in piggyback arrangements were up to 50% more likely to default than solo mortgages.
Mortgage insurance might be a better deal, according to Vicky Gaudet, mortgage loan officer for LA DOTD Federal Credit Union, in Denham Springs, La. “In the past, you were paying extra insurance – in a sense, throwing away your money because it only protected the lender. Now, the deduction will help some members, making mortgage insurance more popular.”
Becky Manasseri, mortgage lending product manager for Addison Avenue Federal Credit Union in Palo Alto, Calif. agrees. “Being able to deduct PMI will bring higher demand,” Manasseri said. “But we’ll encourage members to look at all options. Some still will find it more economical to have short-term second liens, especially those with cash-flow concerns.”
Fueling the American dream
Art Metras, manager of real estate lending for California Coast Credit Union in San Diego, where housing prices have soared in recent years, believes the tax benefit could help first-time buyers. “Take a member with a good job who simply hasn’t built up much equity,” he said. “The deduction might make mortgage insurance a selling point, but it would have to be permanent and broadened to a wider range of borrowers.”
The more it can be shown to help Americans buy a home, the more likely the bill is to be extended, according to Ira Oskowsky, eastern regional sales director for CMG Mortgage Insurance Company in San Francisco. “Traditionally, Congress reauthorizes tax deductions that help people, and the government wants to see more people in their own homes. Congress will watch how well the law is received this year and, in all likelihood, renew it.”
“The intent of mortgage insurance always has been to help homebuyers qualify for loans,” says Michael Callahan, regional credit union manager for Mortgage Guaranty Insurance Corporation (MGIC). “Now a good thing just got better.”
Even with the tax breaks, mortgage insurance isn’t a cure-all any more than piggyback loans. But for some families, it might be the key to owning their own homes.
Charlie Mac is a corporate credit union CUSO and secondary-market investor that helps credit unions reduce the cost of managing liquidity while maintaining strong relationships. For more information contact your corporate credit union investment services representative.