What is the purpose of PMI (private mortgage insurance?)?
Jul 18, 2009 mortgage loan lenders
I have a question. All conventional mortgage loans where the buyer has put down less then 20% as a downpayment are required to purchase PMI (Private Mortgage Insurance) which is supposed to "protect" the lender against any losses should the borrower default. In the case of an FHA loan, these are insured by the Federal Government. Given this why aren’t the lending instituitions collecting their losses from the insurance companies? Is the government not backing the FHA loans? Please help me understand why buyers must have the PMI but now the lenders are asking us for help???
July 18th, 2009 at 7:18 pm
Well, they ARE collecting, when PMI is in place. The PROBLEM is, with these substandard loans, the mortgage brokers were convincing people to "avoid" pmi costs, by taking TWO mortgages – the second would be for 20%, the first for 80%. So many, many of these loans, have no PMI coverage!
Plus, before the lending institutions can collect, they have to foreclose and auction off the property – and that costs money, for EACH property.
The lenders are asking for help, because of Sarbanes/Oxley – SOX. The LAW says, the lenders have to report the "value" of the loans. Well, when no one wants to buy the loan, the "value" is zero!! So that makes it look, on paper, like their assets have dropped dramatically. They can’t convert that zero into the property value, until after they foreclose and auction off the property
It’s not TRUE, in reality, that the loan has dropped to a zero value, because the PROPERTY is still worth something – it’s just no one wants to buy the mortgage on the property.
SO, the PMI doesn’t apply. The mortgage doesn’t even have to be in default! It just has to go to "not sellable", for the lender to not be able to use it as an asset. And with all the subprime market fallout, well, no one is buying mortgages, especially the higher risk ones.
Hope that helps.