Even though mortgage rates hovered near 40-year record lows last week, not all categories of home buyers shared in the benefits. In fact, for one sizable group of American borrowers, the price of mortgage money actually took a significant jump upwards.

The group: People with what the home loan industry calls "A-minus" credit profiles. A-minus means slightly imperfect credit--a missed payment, a series of late payments or other credit file glitches--just enough to depress an applicant's credit scores and worry prospective lenders.

In terms of "FICO" credit scores, A-minus generally runs from 619 to 574. Millions of consumers have scores in this range, including large numbers of home buyers. (FICO credit scores, named for their developer, Fair, Isaac & Co., are widely used by the mortgage industry to assess applicants' relative risks of future default. High scores--above 700--are considered to be low risk; scores below 620 signify heightened risk of default. Scores below 575 generally are considered "sub-prime.")

The recent jump in A-minus mortgage costs has been confined to applicants seeking to buy or refinance homes with less than 20 percent downpayments or equity positions. All of these borrowers normally are required to pay private mortgage insurance (PMI) premiums on top of their regular monthly payments.

Over the past several weeks, virtually all private mortgage insurance companies quietly have raised their premium rates on A-minus loan applications, pushing up the effective cost of some low-downpayment loans by 1 1/2 percentage points or more. Some borrowers who would have been charged 8 1/2 percent before the price rise would now be aksed to pay effective rates close to 10 percent. Other borrowers--those with scores of 600 or more--have seen effective rate jumps of between one-half and three-quarters of a percentage point. Many of the loans affected are purchased by investor Fannie Mae through its "expanded access" programs aimed at first-time and marginal-credit buyers. Fannie Mae had no comment on the insurance premium jumps.

Geoffrey F. Cooper, a spokesman for the highest-volume private mortgage insurer, MGIC Investment Corp., said the premium increases mainly affect applicants with low FICO scores and relatively high debt-to-income ratios.

"We have to price (insurance premiums) to risk, said Cooper, "and the risk is high." Higher, in any event, than the industry had anticipated when it set its premium rates for A-minus borrowers last year. Executives at other insurance firms said the default frequency of A-minus borrowers in the softening economy has been trending upwards, forcing them to charge more to insure lenders and investors against eventual losses on the loans.

One effect of the insurance rate spikes, say home loan industry experts, will be to encourage some applicants to take a closer look at alternative financing options for A-minus borrowers, especially FHA (Federal Housing Administration) mortgages. FHA loans require minimal downpayments, carry competitive rates and are targeted at many of the same buyers--those with blemished credit, high debt-to-income ratios, and FICO scores below 600. FHA mortgages carry their own built-in insurance coverage and monthly premium payments. The insurer, however, is the federal government, not a private underwriter, and the insurance cannot be cancelled at the borrower's request.

Published: August 26, 2002

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consmer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.