Whether you're a buyer or a seller of residential investment real estate, you need to know about two policy changes that could put a financial damper on some of your deals.

The two largest private mortgage insurers in the U.S. -- MGIC and PMI Group -- are planning to hit investors with higher mandatory downpayment requirements in early March.

In some areas that both companies view as "declining," investors in one-to-four-unit rental properties will now need to have 15 percent minimum equity up front.

Investors with spotty credit or heavy debt loads may find themselves totally blocked from obtaining mortgage insurance in large areas of California, Florida, Arizona and Nevada.

Mortgage insurers like MGIC and PMI cover losses by lenders when they extend low-downpayment loans to investors and ordinary home buyers who have downpayments of less than 20 percent.

Low cash up front is important to many investors because it allows them to LEVERAGE their equity dollars -- for example, buying a $500,000 rental duplex with just $25,000 out of pocket -- a 5 percent downpayment.

But the big insurers say they're paying too many claims on highly-leveraged properties: MGIC alone lost $1.3 billion in the final quarter of 2007 -- so now they're putting on the brakes.

PMI's new policy, which takes effect March 1, will require minimum 10 percent downpayments from investors buying 2 to 4 units, and 15 percent minimum down in over 75 large metropolitan markets the company considers high risk.

Just about all of Florida and California are in that category -- along with Phoenix, Arizona and Las Vegas, Nevada. But there are also a slew of areas on the list that may surprise you -- places like Bend, Oregon; Providence, Rhode Island; and Myrtle Beach, South Carolina.

MGIC's underwriting clampdown takes effect March 3 and covers larger parts of the country, such as the entire Washington D.C. metropolitan area, Long Island, the New Jersey suburbs of New York, all of metropolitan Chicago, Minneapolis, and Atlanta, to name just a few.

Both insurers also are now refusing to cover ANY type of financing with negative amortization or payment-option features.

How can investors handle the forthcoming squeeze? Here's one thought for starters: Look to property sellers to "take back" installment notes to handle part or all of the purchase.

We'll be discussing seller financing -- and how to do it when regular financing sources get tight -- in upcoming reports here at Realty Times.

Published: February 14, 2008

Use of this article without permission is a violation of federal copyright laws.

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.