HUD validates lender-paid mortgage insurance; product pioneer, Amerin, expects more lenders will offer this innovative product

Business Wire, August 21, 1996

CHICAGO--(BUSINESS WIRE)--Aug. 21, 1996--Amerin Corp. (NASDAQ: AMRN), the parent of Amerin Guaranty, said today that it has learned that the U.S. Department of Housing and Urban Development (HUD) has officially clarified its position on lender-paid mortgage insurance (LPMI), a product pioneered by the company, and concluded that it complies with the provisions of The Real Estate Settlement Procedures Act (RESPA).

HUD's clarification, which was initially requested by Amerin more than three years ago, was made today in a letter to Rep. Rick Lazio, the chairman of the Congressional subcommittee on Housing and Community Empowerment. Rep. Lazio had requested that HUD consider whether borrowers were receiving adequate information on this relatively new product and to rule whether it was permissible under RESPA.

In his letter to Rep. Lazio, assistant secretary Nicholas Retsinas noted that Amerin requires lenders to provide disclosure information on LPMI to borrowers. He also noted that, although the product cannot be canceled, "some analyses suggest that over the average life of a mortgage, a borrower may save more from the lower after-tax cost of the LPMI-insured mortgage than it would have if BPMI [borrower-paid mortgage insurance] was canceled when equity reached 80 percent."

As to whether the product infringed on RESPA, the letter said: "We find that regular LPMI products pose no RESPA concerns. The LPMI products that offer lenders experience-based premiums do raise a question of legality under Section 8 [of RESPA], but we conclude that nothing therein is inherently violative of Section 8 of RESPA."

Commenting on HUD's letter, Amerin chairman Gerald Friedman said: "LPMI was the first new mortgage insurance product in almost three decades to offer borrowers choice and savings. A number of forward-looking lenders, including some of the nation's largest, were quick to realize the appropriateness of the innovative product and to endorse it. To date, they have originated more than $3 billion worth of LPMI mortgage insurance in force. Now that HUD has finally blessed LPMI, we would expect additional lenders to begin to offer this product."

Mortgage insurance (MI) is typically required on all mortgage loans with down payments of less than 20 percent -- what are known as high loan-to-value (LTV) loans. Introduced in 1993, LPMI offers choice and value to home buyers. With LPMI, the lending institution -- not the borrower -- pays the mortgage insurance premium. The lender buys LPMI from Amerin at a wholesale price, which is lower than the premium on BPMI for the same amount of coverage. The lender then builds this cost into the interest rate on the loan. Although borrowers are paying a slightly higher interest rate, they usually pay less each month in total payment than if they paid the principal, interest and BPMI payment. And, since LPMI is factored into the interest rate, more of what borrowers pay is tax-deductible. This can save borrowers hundreds of dollars a year.

For example, on a $125,000 loan with 10 percent down payment, LPMI would save a borrower about $9 per month pre-tax, $26 per month after-tax, and more than $330 per year, or about $2,325 over the seven-year average life of a typical loan. LPMI also saves another $108 at closing on such a loan. Unlike traditional BPMI, LPMI cannot be canceled by the borrower once equity reaches 80 percent.

Founded in 1992, Chicago-based Amerin Corp. pioneered wholesale mortgage insurance with two products: discount borrower-paid mortgage insurance and lender-paid mortgage insurance. The company went public in November 1995.

Amerin serves some of the nation's largest mortgage lenders, including Bank of America, Chase Manhattan Mortgage Corp., Countrywide Home Loans, Fleet Mortgage Group and Norwest Mortgage Inc.

CONTACT: Bill Campbell, 212/303-7606