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First off, this photo only slightly understates the buying power I have in the real estate market: 

That’s right.  I can do somewhat better than a birdhouse, but not by a whole helluva lot. 

Ah, but not because house prices haven’t fallen! Truth be told, I’ve noticed more in my price range than ever, some of it even being habitable!  The deflating of the real estate bubble has worked marginally in my favor.

I say marginally, because the mortgage underwriting criteria has been changing dramatically.  Whatever I saved in house pricing, I’ll be paying out in PMI - Private Mortgage Insurance.

For those of you who ain’t hip with mortgage jargon, PMI is required by a lender whenever you have less than a 20% down payment.  And who the hell has 20% down on loan amounts like $100,000 and up?  Get real.   Anyhow, PMI is a bad-loan insurance that you pay the lender, to protect THEM in case you go financially belly-up.  If you default on your loan and it goes to foreclosure, PMI reimburses the lender for any financial loss.  It doesn’t do you, the homeowner, a damn bit of good.  It does not save the house for you, or buy time, or make payments.  It’s strictly CYA for the bank, and you get to pay for it.

Over the past few years, clever strategies like taking out a “piggyback” loan, or second mortgage, were in vogue to avoid PMI.  With the endemic foreclosure problems, however, no bank wants to be holding that 2nd position anymore. So it’s back to ol’ PMI.

But the institutions that offer PMI are charging very high premiums these days.  Historically high.  They have huge losses already on the books, and just like any insurance company after a natural disaster hits, they’re making up their losses by collecting bigger premiums.

Good times.

I’m one of the lucky few who might be able to handle the extra $300 a month this puts on the mortgage payment, without having the whole deal blow up.  Many other buyers are not so lucky.   They qualify for a house, right up until the PMI premiums are factored in.  These conservatively range around $150 and up, depending on one’s circumstances. 

So, if you were wondering why Congress snuck in that PMI tax deduction for income taxes for 2007,  it’s because PMI is now on the moon and the Feds know it. It’s the unspoken deal-killer for many would-be mortgages.  Of all the financial crap I read daily, no one has yet to ring the gong and say: “You know what will make this housing bubble thing worse? If first-time buyers who otherwise would qualify, get shut out by PMI premiums.”  

Now, PMI is not forever. It’s tied to the Loan to Value ratio of your mortgage - the amount the place is worth, vs. what you owe on it.   PMI can be removed once you pay down the loan enough, and/or your property appreciates in value enough, that you hit that 20% in your favor.

Until then, it’s a rock around your neck.  The premiums are not refundable.  If you pay PMI for 5 years, and you’re never late on a mortgage payment, and then you get the PMI waived after paying down extra to the principal balance - it’s a waiver on the go-forward.  Whatever you paid in the past, stays in the PMI company’s pocket. 

I’m kinda halfway through a mortgage transaction right now, that’s been a bigger pain in the ass than imaginable.  I’m frankly at the point where if the deal doesn’t go through, I’ll cheerfully keep my down payment money in the bank and continue to rent.   There’s still many advantages to home ownership - but today’s mortgage and home markets are a gut-check and the timid need not apply.