Two major mortgage insurers are worried about potential speculative excesses in a growing number of U.S. real estate markets. One of them, PMI Mortgage Insurance Corp., is now quietly taking steps to rein in overly-exuberant real estate buyers who are betting on the continuation of high appreciation rates with highly-leveraged loans.

PMI recently sent new underwriting rules to its lender network, tightening up on the number of mortgages -- and dollar risk exposure -- loan applicants are permitted to present to the insurer. Individual loan applicants no longer will be permitted to represent greater than $350,000 worth of total loss exposure to PMI, nor to have more than four PMI-insured low-downpayment loans.

A spokeswoman for PMI, Beth Haiken, confirmed that "we're seeing an increase in investor loans," especially multiple, high-leverage purchases in markets where prices have increased at double-digit rates recently. PMI and other insurers stand to lose big bucks in those markets if home values begin to fall, forcing speculation-driven investors into negative cash-flow positions on properties they'd planned to hold for short periods, then flip for hefty profits.

MGIC Mortgage Insurance Corp, another large underwriter, also is concerned by anecdotal evidence of highly-leveraged purchases of multiple units in some markets. MGIC's vice president for credit policy, David Greco, said "we are watching a number of markets closely" for signs of speculative fever.

PMI monitors the 50 largest metropolitan areas with what it calls its "Risk Index." The index evaluates home price movements, household incomes, employment growth, and other factors to rank markets' relative probabilities of price deflation in the months ahead. In its current ranking, metropolitan Boston and San Jose top the list with better than a 50-50 chance -- 53 percent probability -- of home price declines in the next 24 months. San Francisco (48 percent chance), San Diego (43 percent), Providence, RI (40 percent), Sacramento (37 percent), New York and Los Angeles (36 percent), Denver (22 percent) and Miami-Ft.Lauderdale (18 percent) round out the high risk list. The national probability of price declines is 16 percent, according to PMI.

Late last week, NAR jumped into the issue with a warning that "speculative real estate is risky business." However, NAR president Al Mansell, CEO of Coldwell Banker Residential Brokerage of Salt Lake City, suggested that concerns over the prevalence of speculation-driven purchases and price declines may be overblown.

Mansell said that although a recent NAR study found that 23 percent of all home purchases in 2004 went for non-owner-occupant investments, there is little statistical evidence that large numbers of buyers are flipping their properties -- selling after short holding periods to reap profits. With only three percent of all home buyers selling within a year of purchase, said Mansell, real estate clearly "isn't the sort of quick-in, quick out investment" that would fit the stock market definition of speculation.

"It's true that some people have made fast profits (buying and selling houses) but it's not to be expected," said Mansell. "In fact, it can be risky, and property buyers need to be aware of the facts before they think about jumping in."

Published: March 21, 2005

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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, consumer 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.