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Friday, May 18, 2007

Why Aren't Loans Designed For People Who Don't Need Them?

by Tanta on 5/18/2007 12:17:00 PM

The following question was posed to Marketwatch's personal financial columnist yesterday. You can click here to see Lew Sichelman's answer. Or, being the Calculated Riskers that you are, you could offer alternative responses in the comments.

Note: "Statisticians should only talk to other statisticians" is not an acceptable answer, because we used that to great effect yesterday. ("We" in this case is Sippn.)

Question: For people who can't scrape together a 20% down payment, private mortgage insurance helps them get a home of their own. But what about the large segment of the population who can afford 20% down but don't want to pay it?

I'm in contract on a vacation home. Both I and my wife work white-collar managerial jobs in New York, so we have more than enough to buy the place outright. But we're lumped together with those that can't make 20% down and are forced to pay some 1%-2% more for PMI. That just doesn't make sense, not even for the lender, does it?

So rather than borrow 90% from a bank, I'll borrow only 80%. Then they make less money. Or maybe I'll borrow 90% but then pay some useless middleman his 1%-2% extra. Where's the market pressure to satisfy borrowers like me for whom mortgage insurance doesn't add any value?

While researching PMI, the key insight for me was reading the phrase "studies show that people who pay less than 20% are more likely to default." That exact phrase comes up all the time. In fact, I'd like to see those studies! When was the last one prepared, 1975? Isn't it odd that in our advanced world of actuarial analysis, no one breaks down those numbers to find that those low-down-payment defaulters also have lousy credit, don't have a job, are younger than 25 or whatever.

And isn't it odd that no bank seems to be interested in helping older, perfect-credit people with money get the property they desire without the wasted cost of PMI? Richard Campbell.