Skip to comments.Private Mortgage Insurance
Posted on 09/29/2008 4:29:45 PM PDT by r-q-tek86
Sorry for the vanity... but I've got a question that I hope someone can help me understand.
A caller to the Wells Report on KLIF in Dallas/Fort Worth just brought up an interesting thought... what happened to the PMI that people who put down less than 20% are required to purchase when they obtain a mortgage? Shouldn't these companies be paying off on some of the mortgages that have defaulted? Is this what got AIG in trouble?
Anyone have insight on this?
Weren't adequately capitalized.
Curious myself. I had PMI on my house (it was appraised for the selling price instead of the market value at the lender’s urging- the seller was leaving for a new job and had already bought a new house in another state) and paid on it for 3 years, before I was able to get the bank to re-look at the value and have it removed.
My guess is that those premiums are as sound as money in the bank.
You don’t have to have PMI when you finance 80/20.
The mortgage brokers were getting around the PMI by using second mortgages.
PMI insures the top 20-30 percent of mortgages. They are hurting badly right now and some are out of business. However, most subprime mortgages did not carry PMI insurance because they were self insured. Remember, with all the hubbub over foreclosures, only 4% of loans are in default.
In the great depression over 20% of home mortgages were in default.
I spent years in the mortgage industry. If you have any other questions, or if this did not make sense, ask me.
I understand that, but aren’t most of the defaults from subprimes that didn’t put up 20%?
That is exactly right. To get around PMI and still give 100
% mortgages, lenders were making 80/20 loans. The people who made these loans as well as the people who took them out are largely responsible for this mess. GREED.
Some lenders have deals that waive PMI. 80/20 loans don’t have PMI. Loans below an 80% LTV (fraudulent valuations) don’t have PMI. Then, PMI companies don’t cover loans with fraud, just like fraudlent death claims, etc to life insurance comapnies.
Thanks for the insight.
How did these subprimes get around the PMI requirement? Or is that a state by state requirement?
That explains it pretty well. Thanks.
Here’s what Wikipedia says (take it or leave it):
“Lenders Mortgage Insurance (LMI), also known as Private mortgage insurance (PMI) in the US, is insurance payable to a lender or trustee for a pool of securities that may be required when taking out a mortgage loan. It is insurance to offset losses in the case where a mortgagor is not able to repay the loan and the lender is not able to recover its costs after foreclosure and sale of the mortgaged property.”
In other words, the insurance only gets paid:
1) after default
2) after foreclosure and sale and
3) only if the lender can’t recover his costs from the sale.
Maybe our resident mortgage expert can comment.
I was amazed the people who bought my first little house had 2 mortages on for teh principle and one that covered teh downpayment. You should NEVER borrow your downpayment. That’s insane. And you get what you ask for.
the house was only $90K /sigh
>>In the great depression over 20% of home mortgages were in default.<<
At what specific time during the great depression was that true? What percentage of homes even had a mortgage then compared to now?
Where, in this great depression are we relative to the one in the 1930’s? If we are at the very beginning, would not the mortgage statistic naturally be lower right now?
Thanks. Makes more sense now.
You're right about the 80/20 split to get around PMI, but greed is not what got us into this mess. Social engineering, i.e., a Democrat administration and legislature that didn't think it was "fair" that successful people could afford a house, while unsuccessful people couldn't, is what got us into this mess.
Don't blame greed. Greed is liberal-speak for capitalism. The only people who blame greed for America's problems are those who are greedy, but who are not willing to sacrifice and work hard to satisfy their cravings.
Amidst all the other financial engineering that went along with the subprime frenzy, the mort brokerage business figured it would snag the monthly PMI premia the borrowers used to pay by “capitalizing” same. PMI was not a cheapo thing, it could be $230-$350 a month on a nominal $1500 or so mortgage. Well, when rates were say 5%, the cost-per-thousand-per-month was about $5.37. Which means that a $250 monthly payment would be an amortized payment on a $46,500 loan. So the brokerage decided to pull that payment in-house and buy its own mortgage insurance, then bundle the mort insurance along with mortgage itself. After all, it could get a wholesale rate on these types of insurance policies. And in some cases, PMI was just forgotten about in the haste to originate a loan, any loan, before the borrower walked to the next mort broker down the street. In some cases, the points charged by the mort broker went (partially) to pay for such protection. Point being, the brokerage didn’t want the borrower send that money anywhere else, so it figured out a number of ways to keep the moneys in house. And yes, that was a profound stimulus for the vast growth of the CDO markets. Overarching all of that, once FNM & FRE decided to lower their standards (where once a CONFORMING loan had to be 20% down and no more than 28% back end ratio) the need for PMI sort of dissipated. Because houses only went up!
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