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Go ahead and call me ignorant but...

...this makes no sense to me at all.

When a home owner has a mortage payment that includes PMI or MIP and it is paid for every month how the heck can the insurance company come after the home owner for a deficiency balance in cases of foreclosure or want a promissary note in case of a short sale?

2nd ignorant question: At closing (or after closing) has a homeowner ever received an insurance policy from the PMI or MIP company stating exactly what the policy covers and/or doesn't cover?

It just doesn't seem right to me. After all, what the heck have homeowners been paying for if they (or their mortgage holders) don't have coverage in these scenarios?

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Posted by Kris Wales - Macomb County MI real estate blog & homes for sale search site on 03/31/2009 06:55 AM

Comments (20)

short sales, foreclosures, pmi and mip

20 Comments on Go ahead and call me ignorant but...

MAR

The PMI is a monthly fee. When the owners go into default from not making payments its still a fee that accrues monthly. Its part of the deficiency. I dont think they send out PMI policys.

What they have been paying for is a policy that makes THE LENDER whole. So after the insurance company makes the lender whole they come after the borrower for the funds. Kind of like a car accident. You company pays you then subrogates. This is why short sales need to be done very carefully if you are representing the seller

New wrinkles in short sales every day...have not heard this one...just guessing that if the insurance premium was wrapped into the mortgage payment....and they weren't paying the mortgage...the oh so desperate insurance company added their premim to the homeowners' losses. In cases we know of...the lender has paid the premiums but has their own company if it has been a while...and not kept the insurance with the former homeowners company....that would make the policy null...and they would go after what ? Sounds like more expense than profit...

Charlie explained it well. It doesn't protect the homeowner, it protects the bank.

Kris, thanks for the post. Charlies is absolutely correct. But, I have a question for Charlie. Are the PMI companies paying for all the short sales, foreclosures that are occurring currently?

Kris, Charlie summed it up nicely. The insurance covers the difference between what the purchaser puts down and the LTV. For example, the lender has an 80% LTV and the purchaser puts down 5%. The 15% difference between the 5% down and the required 20% is covered by PMI. In other words, the lender in effect still has an 80% LTV with a 15% coverage by the PMI when the purchaser only puts down 5%.

This is the same reason Veterans can purchase with no money down. The lender gets a 75% LTV and the Government guarantees the other 25%. A no brainer for the lender.

PMI and MIP protects the lender in the event of a default.

Excellent questions and some good answers. Here is my question. If the insurance make the mortgage company whole. Why are the mortgage companies (banks) under so much stress? It seems to me the whole mortgage insurance industry also has a very broken business model.

Laura: I know that it is a monthly fee, paid for as an insurance policy by the buyer for the mortgage lender. I just don't get why the buyer doesn't see a policy (with terms and conditions since they are paying for it) and why the coverage isn't enough to satisfy mortgage holders..

Charlie: I did understand that part (that it covers the mortgage lender) and your explanation/analogy with car insurance puts it more into perspective. I guess my beef is this: If the buyer is paying for it why aren't they given a policy with terms and conditions?

Sally and David:   It all is a jumble in my head as to why the coverage isn't enough...I guess my brain thinks this way: If I am paying for an insurance policy I expect coverage. ::shrugs::

Jen:   Thanks.

Gabe: I'm curious about the same question you asked..

Michael:   I did get that it is insurance for the other 20% LTV but my confusion is to why it isn't enough to satisfy the lenders, and why the PMI companies are coming after the borrowers. Seems to me if the premiums are paid there is coverage.

Mark: Bingo!   That is where my confusion lies..you got to the point much more succintly than I did :-)

I believe the pmi policy is part of the closing package I will double check today at closing but almost positive. You would think since it's an insurance policy they wouldnt be the one demanding the money.

Heather, I attend every closing and I can tell you I've never seen the PMI policy there at the table. Unless it is tucked into the buyers package while the copies are being made I haven't seen it.

Kris, great discussion here. I have learned a lot but I must agree with you that I have never seen a PMI Insurance Policy at closing. Could they mail them to our buyers later?

Kris, it sure does seem backwards, but this is just another example of people not really knowing what they are paying for.

Kris, Excellent questions and good responses. Thanks!

You have a great point..and one that I never really thought of... don't you love insurance...you pay for it....because they never want you to use it.. :)

I just asked that question. The MI company was the only one in the transaction that asked for cash or a note at close.

The buyer doesn't get a copy of the PMI policy as it doesn't insure them, nor are they the beneficiary. If you're in a no-fault auto insurance state and get in an accident, the insurance company for the driver at fault pays for damages. The other driver never gets a copy of the at-fault driver's policy, do they? The lender is the only one that gets a copy of the PMI policy.

Mark Watterson - Charlie was a little bit off about PMI "making the lender whole". A PMI policy insures a portion of a loan - often the difference between how much a buyer puts down and 25-35% of the purchase price (appraised value on refi's). Historically, lender have expected to recoup the rest of their loan through the liquidation of the foreclosed property. In today's market though, lenders often can't come anywhere close to selling REO's for the 65-75% of the original property value the whole PMI system was modeled on. So lenders are taking large losses on foreclosures despite PMI.

Gabe - PMI companies are only paying for a portion of short sales and foreclosures - the portion they insured.

Feel free to email directly any other questions on PMI. It's all kind of fun understanding how to get rid of PMI and the laws governing how it automatically gets cancelled. dsygit@TheLendingEdge.com

APR

The comments here are awesome, especially Michaels. You learn something new every day in the Rain.

Diane: After reading Drews reply I now know that the homeowner doesn't receive a copy of the policy. (They pay for it..but don't receive policy guidelines.)

Greg: That's my take on it also. Sad but true.

Judi: You're welcome.

Konnie: At least with our car or homeowners insurance we get a copy of a policy that states what the coverage is or isn't.

Terry: I'll jump over and read what your situation was. Thanks.

Drew: I did understand the coverage of the LTV part, but can't comprehend why if a buyer is paying the premium they are not entitled to a copy of the policy. Thanks for the detailed answers, I do appreciate it and have gained much more knowledge about the ins and outs of PMI from you.

Greg: It is a learning experience daily here.

Kris, the buyers don't get a copy of the policy because it's not their policy. I know that's already been said, but the buyer has to pay for it because the lender requires them to pay for it if the buyer wants the loan.

Best comparison that I can think of is when a parent insures a car for teenage driver, but the parents tell the teenager that if they want to drive the car, then the teenager is going to pay for the insurance. Not the best example, mind you, but same principle.

APR

Roger: Good analogy. I get it now, but I don't like it :-)

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