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Private Mortgage Insurance, tell me again why I paid it?

So many people over the past couple years saved money getting a 100% loan rather than an 80/20 or 80/15/5 loan. But, those who got that 100% loan were stuck having to pay PMI on their loan, which in reality, if they paid it down below 80% loan to value ratio, the PMI would be taken off.

But, as many found out when the bubble started to burst, the 80% mark was going to be a lot harder to hit than they thought. With declining house values, that 80% value just wasn’t there anymore and they were stuck paying this PMI for a lot longer time than they had planned.

So, now they are stuck paying this insurance bill every month from anywhere between $100 and $200 a month, basically to protect the bank if the buyer should default. Just like in a car accident with a new car, the insurance is there more to protect the person who gave the loan rather than the person actually driving the car.

But, yesterday, I was being told by the negotiator of a short sale I’m doing, that they are willing to accept the terms the buyer has presented to the bank as long as the seller is willing to sign a promissory note for $25,000 with no interest at $101 dollars per month. I then asked for what? They said that is what the private mortgage company is requesting to pay them back for their loss on this transaction?

WHAT? Why has my client been paying the $176 per month for the past two and a half years for if the insurance company wasn’t going to actually pay if the home owner defaulted?

Isn’t that what that insurance was actually put in place for in the first place?

So, we have sent it back to the bank telling them to take a hike as that is what that insurance is for and why he has been paying. If they don’t want to accept that, then they can have the home back according to the owner. I’m hoping it doesn’t come down to that, because this seller really has done everything the bank has asked to get this home sold and I know these buyers have been waiting way longer than I expected anyone to have to wait to move in to their new home.

It really would be heart breaking to have to tell them the bank is not willing to do this deal because my client won’t pay the insurance company back something that he already has been… a premium every month for just in case something like this happened.

What are your thoughts on this? Any suggestions?

Todd Clark - Broker / Sales Coach
Palazzo Realty Group
Phone: (503)524-9494
Fax: (503)622-8739

Daily list of short sales available in Beaverton, Oregon

Posted by Todd Clark (Broker) (503)524-9494 (Beaverton, Oregon Real Estate Expert) on 07/12/2009 07:07 AM

Comments (102)

PMI (Private Mortgage Insurance) in the Mortgage / Finance Channel

pmi, private mortage insurance, short sale

Originally posted at: Living Beaverton - Your guide to everything Beaverton: Private Mortgage Insurance, tell me again why I paid it?

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Post is included in group: Short Sale and Loan Modification Nightmares
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102 Comments on Private Mortgage Insurance, tell me again why I paid it?

JUL

Todd, it's what insurance companies do - they're on your side - until you have a claim. I would ask them to show me in writing anywhere where it says in their policy that if someone defaults on a loan - which they were covering - that they should sign a promissory note. That's what the insurance was for! Unbelievable. I don't blame the Seller for not paying.

Sharon

Todd: It sounds like they are trying to play hardball... hoping your client will play catch with them. The original and monthly PMI is just that... private mortgage insurance, protecting the lender from loss. But... when it was originally done... everyone ASS-umed that values would not drop like they have in many areas. I don't know what percentage of the original loan the original PMI was supposed to cover. What was the original loan... 80/20... or 90/10... or 95/5. PMI coverages are different for each of those cases as far as the coverage is concerned.

But back to the beginning... the PMI was originally charged, and paid by your borrower in anticipation of something like this happening. I think your lender is just seeing if your seller will "bite." Just my two cents.

Also... getting the loan down to an LTV lower that 80%... the figure I have most often heard, is 78%... again, assumed that values would not drop. What the other side of this was... that if the loan amount dropped to 78% of the original loan... it was ASS-umed that the property then would have 22% equity. Obviously, if the home value was below the loan balance, even though the loan amount may have been lower than 80% of the original sales price... if the value dropped... there is no way the home could have 22% equity. It may have had NO equity. Am I making sense here ? Again... now I'm up to saying... just my three cents.

Todd: That's surreal. I feel fortunate that I do not have PMI.

What the lender is really saying is: if you don't pay this extortion our premium for this insurance will go through the roof and we don't want that.

It's just a case of one good extortion deserves another. The insurance company is trying to extort the bank. The bank is trying to extort the seller.

You have got to give them credit for trying.

After all, the lack of this sort of tenacity (on the part of lenders/secondary market investors/insurance companies) is what made this mess.

Interesting and I haven't seen much of this being asked for by the PMI company's. That is a tough one for a seller.

Todd,

They are just trying to protect their bottom line, but your client is right, can you imagine your car insurance coming back to you for half the damage for your car after you have already paid the deductible? They are just try to strong arm your client, I say, call their bluff and if they do foreclose, then they can pay the whole amount instead of just the difference between what I'm guessing your selling it for and the actually loan amount. Where if they took it back and sold it as an REO that spread would I'm guessing be much larger.

It is amazing what insurance companies try to get away with, and in most instances they do get their way. How many people will challenge the big insurance company? Not many.

It is no different with homeowners insurance. Dare to submit a claim, and once you are done fighting with them to cover your loss, they will cancel future coverage.

I hope the short sale goes through and the bank drops the request for the promissory note. Good luck.

Todd,

I disagree with Private Mortgage Insurance, tell me again why I paid it? PMI is very miss understood. PMI does not insure the home owner. PMI is used when the buyer doesn't have the 20% equity required by depository lender. It insures the bank that in the event of default that the bank will never suffer a loss any larger than they would have if the original loan had been for 80% LTV of the original value. It should have been called HBPB for Home Buyers Performance Bound then there would be less confusion.

From the home buyers point of view PMI is like posting a bond in lue of making a down payment. The current populist PC view is that it insures the buyer it never has.

In the event of default if the lender has a loss they are entitled to the "bond/insurance" money, but the lender/insured can't create the loss any more than the home owner can burn down the house to collect on the fire insurance. When the lender voluntarily accepts a settlement/loss from the home owner he has to have the PMI companies approval.

In states that allow deficiency judgements PMI companies are entitled to collect from the former home owner, just like any one defaulting on a bond. Perhaps it's more understandable to think of PMI like car insurance when you're hit by an uninsured driver your insurance company pays you then goes after the person that caused the loss. Unlike auto insurance PMI is totally about protecting the bank, your assumption about car insurance is wrong, when I got broad sided by anj unlicenced drunk in an uninsured, unregistered truck a few years ago my insurance company paid me for the value of my truck to pay off the bank and my equity which I used to buy another, it was all about protecting me, I owed the money even if the truck was gone.

The PMI companies with some notable (AIG) exceptions receive no bail-out money, no stimulus money. PMI companies don't deal with the public so there is no public relations reason for them to settle. Your client is paying the $176 each month for the privilege of not putting 20% down, not for the right to default!

"Isn't that what that insurance was actually put in place for in the first place?"

It's not insurance it's a bond! No insurance or bond pays simply because you want it to! Try calling your car insurance company and saying you want $10,000 or your going to total your car, it's the same thing! Almost all financed cars are upside down, except PMI is likely to make some concessions in today's market, State Farm is more likely to have you arrested.

You probably did the right thing telling the bank to shove it, but we don't have enough information to know. If the owner/seller is collectable PMI is not likely to give, but if default is likely unlike the bank the PMI company faces a 100% loss. Their offer isn't bad, that doesn't mean it's good for your client! Decisions should be made rationally, not out of some miss guided PC sense of entailment!

If your sellers are really in trouble you might suggest that if the bank and it's PMI company don't accept the offer the seller will provide them with a deed in lue of foreclosure. This would mean a guaranteed 100% loss for the PMI company and possibly a bigger loss for the bank. You know the bank can settle with their PMI company, too! The bank doesn't have to collect 100% from the PMI company it wants too! The bank is not necessarily talking about $25,000 because the discounted value of the proposed settlement is between $14,000 and $17,000. The only thing wrong with playing hard ball is that they might call your bluff!

Bill

For the record. Thanks to Countrywide's stealing PMI premiums the lender has to give up coverage and stop collecting when the home buyer's equity reaches 78% of the current value, provided that the loan is over two years old.

The lender doesn't take the fall cuz they are insured...and then the insurance company doesn't want the whole deficiency either....In our experience, this can be negotiated to a miniscule amount...sometimes even a tiny hit up fromthe buyer. Good luck...call us if we can help !

Boy, I'm with you on this.

Several years ago, I had a client who was about to lose her home due to illness forcing her out of work. She had been the president of a mortgage company, so she knew more than the average person about what goes on behind the scenes. She got the PMI company and bank talking in advance, and the bank allowed her to sell the home for less than she owed based on the PMI company commitment to cover any loss.

Quite a different scenario from what you're experiencing in this case.

I've questioned this before and can't seem to wrap around my brain that paying for an insurance policy for years doesn't earn you the coverage you expected.

Frankly, I'd love for someone who got the screws put to them to turn around and sue the PMI companies and have it be a test case.

Todd, I have not experienced this yet but it seems I need to read up on PMI.

Very interesting. Earl Corket in my office is one of the oringinal creators of PMI. I'm going to send this over to him and get his ideas as I'm sure he knows the real deal.

Mind-numbing. That is all I can say. Let me guess, are the PMI companies going to be next for a bailout? It appears that they could be in trouble if this is what they have resorted to.

Has anywone ever seen a PMI "policy"?

We've had lenders holding a second try to play the PMI card on us when dealing with a short sale. They seem to capitulate the closer you get to the foreclosure sale date. On the other hand, we've had seconds be very stubborn until the whole thing unwinds, the home sells on the courthouse steps, and they are wiped out. There is no sense in what is occurring - each seems to be negotiating to get what they can with no real concern about the institution, the property, people, etc. It seems like there is a lot of gamesmanship ... but the negotiator has nothing at stake except maybe their commission, if they are rewarded on performance. They aren't playing with their money, their home, their community image, their credit ... etc. like the borrower is. The PMI card seems to be the new "Your aren't authorized", or "We haven't received your package please resend it", or any of their other stalling techniques. Good luck! Stay the course.

That is crazy. What do you pay insurance for anyway?

The whole insurance business in general is nuts. We have health insurance and my son broke his arm riding his bike last year. After the ER visit, our insurance agency called to quiz us on how the accident happened, and where, and if anyone else could possibly be responsible for the accident.

if you have kids, you know accidents just happen. They were insistent on tracking down another responsible party--where did he fall? Was he on your property or another person's? Did he fall in the street or your driveway? I DON"T CARE! He's my kid, he fell, he got hurt--pay the medical bill, okay?

I have seen PMI companies shoot down a short sale after the mortgage company approved it. Between a rock and a hard place.

My clients had been asked to pick up $60,000 in a promissory note - they negotiated down to $30,000 because they didn't want to go to foreclosure.

Todd, Thanks for your post. And William, thanks for your comment. We need to learn all we can about Short Sales.

I have said great post before, but this time with superlatives. You have voiced what needed to be said for a long time. What also gets me is that often these notes are unsecured, which means that they can't collect. They can report, but isn't this a meaningless exercise in book keeping?

Todd: I have noticed in working Short Sales, the lenders have to get approval from their investors before accepting the short sale. I'm working on now that the lender tolder me to reduce the price. I did this to their price, them we sold the home. Them the investors wanted to counter the buyer for nearly $10,000 above the list price. We sent it back to them and asked if they would like to sell this home or foreclose. They approved the short sale and then there was ajudgement that popped up on the title. We got this negotiated to only $1,500 and now we wait again for the investors approval.

Lucky for us there is no PMI on this one..

Todd: Wow, I haven't thought about the PMI side of things. Although it always seemed phony on premise. Right in there with making loans more expensive for people with a less income. I feel so fortunate, I had a plan. I got in at 3% down and every month put as much extra on the principal as I could. I got rid of my PMI about 2 years ago thank goodness.

[PMI is very miss understood. PMI does not insure the home owner . . . It insures the bank.]

You nailed it Bill. :)

Why did you pay it? Because you didn't have an acceptable down payment. And now you want a Mulligan? Nah.

Candice De Vil ;)

I agree with Candice and William. Many are misunderstanding the true purpose of PMI. It is to protect the lender. As with most debt situations, depending on state law, the PMI issuing company then may pursue former homeowner for their loss.

Hi Todd,

We commend you for your stellar performance with AR and only hope we can measure up to your level of achievement someday. My wife and I are new to AR and blogging. In fact this is our first attempt at blogging (THE PREMIER MANUFACTURED HOME BLOG) and we're trying to learn a few tricks about how to achieve recognition, acceptance and appreciation for our message.

We have been in the Manufactured Home Industry for 3 decades (onthelevelcontractors.com) and bring a tremendous amount of information, knowledge and experience to the table in the area of engineered certification, affidavit of affixture, foundation inspection, installation, repair and retrofitting for manufactured homes.

We have established a nationwide network of RE and Mortgage Brokers that use our servcies regularly and feel that the AR community is a very viable venue in which to broaden our exposure but most importantly share our knowledge and services with those who need them. Any suggestions or ideas from you, as obviously "as top AR blogger, would be greatly appreicated.

Regards,

John & Janis Arendsen

Scott, do you really feel what you wrote. If so, you have fallen off the edge. Where in the PMI policy does it say anything close to what you feel it should obligate the writer of the policy. I know you are not new to the industry so why spread this carp.

PMI was designed to protest the lender not the person paying the principal. That is called life insurance. Either you are ignorant of the true reason for PMI or just want to make it look like you are so in agreement with the buyers. In either case you do a disservices to the industry. PMI is and always was a lender protection and not a buyer protection.

Don't show you ignorance of things that have been around for this long and try to paint them something the are not! You only exasperate the problem!

Hmmm, this is a tough one that's for sure. I wouldn't pay it if I were the seller.

Patricia

I have heard that the PMI companies have stepped in on short sales negotiation to put their claim in on the proceeds. What money they don't recover from the homeowner at the closing table they will try in recover after the sale.

Todd --- all this just seems so ridiculous --- yes, what is the PMI for? It is to protect the lender --yes, the lender has already been paid by this homeowner --I agree that I cannot understand why they want to be paid twice. Best of luck to the homeowner.

Mama Liz's Signature

Good for you, all but one of my sellers have walked away only to be ask to come back. I hear a lot of agent (in my humble opinion letting their clients accept this) wow why did they representation for that.

I was talking to an attorney at a luncheon the other day and he though that in a court of law that could be proved to be "not in the best interest of the client". I could see the wheels turnng so I moved on. But he could be right.

Yikes I am confused if the PMI the buyer pays for every month protects the bank then shouldnt the bank be the one dealing with the PMI company for the loss? The buyer pays for it at a pretty healthy monthly amount but now you say it means nothing for the buyer? Insurance in all forms these days is pretty much a joke... you pay but dont ask for anything when you need it because your rates go up or they drop you... so pay but get nothing and then when you are in your most dire need to sell short...you owe more... I just do not get it... and the PMI is almost nill and void to get now... some lenders can not even provide PMI anymore... the world is ever changing... but PMI payments have been made for years on massive amounts of loans... someone somewhere made some big bucks and now we are told it wasnt to proetect the people who paid it for the loan they were also paying on... you all can call me stupid but I call this a big scam!

Any lender who loaned out 100% of a property's value had to know the risks involved, which lead to the need for PMI. Borrowers should also have been aware that they were involved in a risky transaction, but rising values colored the judgement of many otherwise reasonable people. All parties involved share blame here and the insurance company should not be asked to be wholly responsible.

Todd, what a tough situation. I agree with your seller's decision not to pay. What will they think of next. I am going to reblog this. It is great info for seller's to know there is another kink in the hose.

Yes, unfortunately this is going and and keeping deals from coming together -- its a sign of the times.

You guys keep talking about the loss but its not a loss due to short sale, which the lender doesnt have to accept. Ita a loss if the property is FORECLOSED and doesnt bring the loan amount in proceeds. The lender collects from the MI company.

One must be careful to interpret your description of the conversation with the lender? You said: "they are willing to accept the terms the buyer has presented to the bank as long as the seller is willing to sign a promissory note for $25,000" By 'they' you mean the MI company? If so, they have no power over the short sale transaction, correct? Thats up to the lender. If by 'they' you mean the lenders thenI have a different response. Please elaborate.

Without knowing more, my initial reaction is the MI company doesnt have the right or power to dictate anything here.

Forgot to add that no one made the borrowers take a loan that required MI, and the potential loss is to the MI company. Though some states are non-recourse this is between the lender and MI company. The lenders didnt have to give the programs that required it. No one is taking advantage of anyone. Its all part of a runaway false system that put our nation into the current strangle.

No money down, No qualifying. Overpaying by people who sold a crap pile in Calif for a mil then moved to places like Oregon to pay 225K for a 200K home just to be sure they got it, justifying it because the same home would have been 750K back home. ALL people in the industry are to blame. Lenders, mtge brokers, real estate brokers, wall street buyers, fund managers, every last one.

Yet, when crap hits the fan no one wnats to take responsibility. Again, I'll reserve judgement and further comment on the title discussion until we are given more info.

Wow, thank you everyone for the great input and William thank you for the wonderful insight into PMI. As someone who really only dealt in Owner Financing and Lease Options during the first 5 years of my career, I guess not dealing with PMI was a blessing, yet still a misunderstood product to me. Now that you have added so much to it, I can understand why these companies would want their money back, but I'm also thinking the wrong party was paying the premium for the service.

Todd,

You're welcome.

Some lenders will pay the insurance themselves, but they add it into the rate and the buyer pays the higher rate for the life of the loan. This was pioneered by Countrywide after they got caught. It might be acceptable in a falling market and there were tax advantages, but the savings disappear. Better to pay for your performance bond.

Bill

Scott (or Todd Free) you feel that the wrong party was paying for PMI. They had the opportunity to opt out by putting down an adequate amount. Now you have only been doing this for 5 years and it is easy to misunderstand some of these things. PMI is not that complicated, so here is a brief outline. When a bank sells a mortgage that has less than 20% down, they must guarantee to the purchaser that 20%. In order to do that they find someone to underwrite an insurance policy to guarantee that 20 % or whatever is short of it. In order for them to buy the home and get the loan, the buyer agrees to pay a premium. End of story.

Now since they did not pay for the home, the insurer does have a right, short of the foreclosure process to refuse to accept and offer. They are a lien holder just like a second mortgage. With banks offering the second less than is fair, it is a move by these insurance companies to delay or negotiate for more. End of Part 2.

Scott free or Todd, you people needed to pay the premium in order to secure the loan, Secondly they needed to continue to pay the mortgage payment to own the home. End of part 3, they loose and so do you if you tell them they afre right and the insurer is wrong.

Gary, I've never done a loan with PMI as all I've really done is owner financing, owners don't require that and this is something I'm coming in to as a listing agent on this short sale. When I hear the word insurance, I think like car insurance, but as I'm finding out from William that is a bond and not really what a lot of buyers were being sold at the on set of the loan.

Todd, never has any bank told a person that that was a loan guarantee. For you as an agent not to understand it, is even less defensible. I don't mean to come down on you but part of our trade is understanding the basics. PMI is a basic. Shame on your Broker if they did not set you straight. If you have doubts on something, the first place you should go is to your Broker, rather that posting this blog where you twisted the real world with what you would like it to be.

There are agents that posted here that agreed with you and they are also wrong. If I were a contractor that had a $500 lien on the property, you would also have to get my approval. How does that differ? I can force a foreclosure process if I will not sign off.

These people may be ignorant of the truth of PMI but it is not Fannie Mae or Freddie, they don't guarantee the loan.

So, perhaps, a better form would have been asking your Broker and then posting your comments on what he told you. All to often there is bad advice given in this forum and it is because people, although well intentioned, write before they ask. IMHO

JUL

If you are an insurance company there is only one golden rule that applies univerally to all - collect money (premiums), and pay out no money (claims). Period.

Just think about last week or last month when you were screaming at your health care or dental insurer - if you are "lucky enough" to have one - about paying a claim that they are clearly supposed to pay. Sometimes, even, after they agreed to pay the claim.

My disdain for insurance companies has no end...that's why I have the highest deductibles I can afford, and self-insure to the extent that I can.

Now, don't get me started... :)

You should always always always deal with the 2nd mortgage first in a short sale transaction!

I'm just curious as to why anyone would think a foreclosure would be a better option for the lender and PMI company instead of mitigating their loss via a short sale?

This was very informative - I read thru all the comments as well- learned a lot as well - thanks all.

Todd - If I were in the Seller's shoes, I'd be very tempted to hand the lender the keys, and just say, "NO." It is amazing to me that more lenders don't find themselves in court over their antics. However, they are probably hiding behind the skirt of "Everything is negotiable." But having a lender impose a $25,000 note, on a home they had been paying PMI on is outrageous. It would be like paying for expensive Health Care, and then having the hospital bill the patient for the same procedure too.

The fact that the PMI company is asking for repayment is likely directly correlated to the finances of the seller as well. Just because the seller is in a situation that requires a short-sale due to being underwater on the property with no accessible cash to offset the difference in net proceeds of the potential sale doesn't mean that cash flow /the ability to repay all (or a portion) of the shortfall isn't in the cards. Are you aware of what the seller's fiancial package loked like? If the seller has the ability to pay the $100/month interest-free, it is likely the best-case scenario to keep their credit somewhat intact while going through this process.

William J Archambault Jr (The Real Estate Investment Institute ) and though crude, Gary J. Szolosi, have nailed exactly what PMI is and for what it is intended. I don't think there is a need to elaborate more on it now.

I think that your sellers may want to look at this from another angle as well. I don't know the details of the transaction, but I'm pretty sure that $100/month is alot better than the current payment. I'd also wager that $25K is alot less than the amount of the "short" in the sale. Finally, unless your sellers are going to be homeless and penniless after this transaction, I'd guess that $100/month is a payable option and much better than a foreclosure on their credit.

It may be time to sit down and discuss some common sense solution to this rather than a knee-jerk reaction to some sleight against them, be it undeserved or otherwise. My 2 cents.

Very glad to see this topic raised here on PMI - quite an education. I wish our real estate licensing courses dealt more with the real issues we face in our business each day. I've learned a lot by reading this entire post - thanks everyone for their contributions.

arrghh. I hate when this happens. I agree with your seller, if the bank does not acquiesce, the bank can take a hike. That's one of our challenges, if the banks are at all adversarial, the sellers will just walk. Many sellers have already emotionaly "let go" of the home and if the short sale is too onerous, easy for them to simply say, "screw the bank".

From what I am looking at here, there are a lot of Real Estate people who don't fully grasp the concept, function and purpose of PMI. I'm not saying this to deride or embarrass members, but to prod you to learn about PMI and it's role in the mortgage transaction world. I think that the largest problem comes from the fact that the word "insurance" is part of the phrase. People are used to the concept of 'insurance' protecting the PAYING party, just as they do their home or car insurance. In this case the borrower does get something for their money - the privilege of paying additional money with their mortgage to be able to NOT put 20% down.

As for the post, I would (based on what information was given in the post) tell the requesting party to get stuffed - but in a *nice* way. From the information provided it would seem that this is a request in the hopes that someone will be dumb enough to agree to pay. I would dare say that in a thorough review of the contract for the PMI, that you will not find any language about liquidated damages - or in this case, exit extortion. I would stick to my offer. They can accept it as is, or they can get the whole enchilada back and suffer the entire loss. Merry Christmas.

People asking for monetary items at the zero hour are hoping that you will cave in to keep the deal alive. Most times this is nothing but a tactic to gain a little here or there. Follow the money and you will find the motivation - then you will know if this is a real deal killer or just another grab for the brass ring.

It appears to me that the seller wants to walk away without a deficiency claim for the short sale. The seller owes the money. He'll either pay the bank or the insurance company. Time for a reality check in the real world.

The seller may not like the terms but he/she/they did sign a promissory note to pay the full amount of the loan. The insurance company is subrogated to the bank's right to collect the note to the extent that the insurance company pays the bank.

The PMI was not for the seller's benefit, it was for the bank. It was a condition of the bank to make the loan to the sellers for a less than 80% LTV loan.

First of all in the State of Oregon, the owner will not have a deficiency. Once the foreclosure happens, he is done and no one can go after the seller. So, in reality this is a desperation move on the insurance companies part. Now, before the seller talked to me about his decision he called his lawyer and it was his lawyers advice to tell the bank to where to stick it. As for me not knowing a lot about PMI, a little rude on the comments, since I had never had to deal with PMI until Friday. (I WORK OWNER FINANCING - NO PMI REQUIRED)

I have chosen not to learn about commercial properties either, because I don't plan to work that segment of real estate, does that make me a disgrace to real estate? I think not! I have been studying up on PMI since Friday and I do have to say thank you William for your proper way of handling my question and post.

As for what the banks are telling clients, this client was told when he got this loan originally that he would be better off going with PMI than an 80/20 loan because PMI could be dropped after 3 or 4 years and the PMI was the "INSURANCE" he was paying to protect the bank incase he defaulted. Was it a broker or a bank person, I don't know I wasn't there when he got the loan and that person isn't in the business any more... BIG SURPRISE!

So, clearly this was a legal question and I personally still agree with this guys lawyer, tell the bank to take a hike and good luck with selling it!

Hi Todd,

Others may have mentioned this, I didn't read through all the comments. However, PMI is designed to payoff the lender if the borrower DEFAULTS.....NOT when choosing to negotiate a short sale unfortunately. Contractually, short sales and REO's are very different as far as responsibility to the seller. In saying all of this, I would fight for your seller too because I believe the lender and the insurance company are in communication on structuring the "deal" to reduce their loss, so your borrower should negotiate as well.

Good Luck!

Steve Dinielli

Surprise!! Yes - that is what many are feeling when the PMI companies fail to pay.

I am a residential appraiser who specializes in reviews. I have been hired over the last 6 months by many companies, to perform retrospective reviews on appraisals from 2005-2007. The primary purpose of these reviews - is not to determine what the value SHOULD have been. (Most of the time the values were way off, sometimes within 5%)

The primary purpose is to see if the original appraisal was in compliance with USPAP (Uniform Standards of Professional Appraisal Practice) - and to see if there was any fraud.

If the PMI company finds that they based their insurance on a faulty appraisal...they do not have to honor the insurance contract. Funny - all the parties to the sale back in 2005 just wanted the deal to close! I remember getting yelled at by many of these parties for not "hitting the sales price" or "making value". Most mortgage brokers who could at the time shop for "comp checks" were shopping for the appraiser who would give them the highest appraised value.....

Once again - in the end - it is the consumer who get screwed! That is why ethical appraisers need to rise to the top in these days - protecting the "public interest" which includes the lender AND the consumer.

Great article and feedback. I am currently involved with a buyer an a quandry,over a property to follow thru with a counter offer, where for the final offer approvals, the listing agent came back and asked not only for the "highest and final offer" but, also that the buyer pay for $3300 for the PMI that the lender was asking of the seller. Even the buyer was smart enough to catch this one. The listing agent claimed that the seller did not have the money the lender was asking for so they were asking the buyer to pay it!

It makes one ask, "Who's pulling what, out of where, to satisfy who?" Will it be on the HUD-1?

If this weren't crazy enough already....

This is one of the best threads I've read on AR. I appreciate the comments especially. Too many read the post and jump straight to comment on it without reading others comments.

Thanks to William, Gary and others for taking the time to better explain the rules of the game.

This has been very interesting to read, especially the comments. I too have misunderstood what PMI is, and I am glad to have had the opportunity to understand it better.

You wrote:

"But, those who got that 100% loan were stuck having to pay PMI on their loan"

PMI is based on the LTV of the first, not the total loan amount. We've sold hundreds of homes with 80/10/10, 80/15/5 loans and none of our buyers have ever paid PMI.

Only buyers using a 95% loan with 5% down or a 90% loan with 10% down paid PMI.

I just had a similar deal with a seller who had lost her job and has been unemployed for 3 months, on unemployement with no prospects for any new job soon. The PMI company offered her a 0% note for $17,500, to begin in 6 months (to allow her to get on her feet) and paid out at $100 per month over the requisite number of months. She, because she is an ethical and moral person, agreed to this, even though she has no way of knowing whether she will be able to do so.

My question is this: her mortgage states that the borrower is not a party to the MI insurance. Doesn't this mean that the two parties are the lender and the MI company? And isn't the MI company actually telling the lender that the MI company wants the lender to pay $17,500 and the lender responded that they would get the buyer to pay it for them?

If, as some have noted, that the MI is a bond for the borrowers performance in lieu of paying the 20% at the time of closing the original sale, then when the buyer signs the paperwork, shouldn't the buyer have something in writing that tells them what their obligation will be in the case of default? Every buyer I have ever worked with would tell you that they, the buyer, was paying for MI in case they, the buyer defaulted, so that they would come out whole. (And please do not start haranguing me about what a competent Realtor should know or not know about PMI. I don't do pest control and I don't do mortgage lending. If anyone should have informed the buyer about PMI, it was the lender!)

It seems to me that all of these borrowers might have a legitimate class action law suit against either their lenders or the PMIs or both for failure to educate or notify of the liability they were incurring in taking on PMI. In the case I am referring to, there was nothing in the original closing document that made any mention of PMI except to indicate that the borrower was not a party, so they cannot come back and say she signed even a disclosure. We, as Realtors, have to disclose everything we do, down to if we sneezed in the property while we knew we had the flu. Shouldn't lenders and PMI coompanies be held to the same standard for disclosure of potential loss and liability by the borrower?

I'M NOT FEELING SORRY.

All these buyers should have simply saved up all their own money and put 20% down. OH.... You don't want to do that....

So then you SIGNED A CONTRACT that allowed you to buy... Now you want out and don't like the rules?? PMI is the nesessary evil, and two loans to avoid PMI is a scam too. Most people didn't save in the long run.

Obama bail me out mentality? You bet. No personal responsibility? You bet. NO ONE PUT A GUN TO YOUR HEAD TO BUY A HOME.

SUCKS BEING ALL GROWN UP doesn't it?

I'm sorry if you are one of the few who bought what they could afford and have now lost your job. For the rest of you...too bad.

By the way, I don't work for the PMI companies... I'm just sick and tired of the cry babies looking for someone else to bail you out.

This is the nature of the current insurance environment. When AIG went under so did the entire Credit Default Swap market (insurance on Mortgage Bonds)....the insurance field went belly up and no longer have funds to pay out on the PMI losses. This is another "shoe dropping" that the Main Stream Media cannot even understand.

The Ponzi scheme works like this: The collect the Premium, invest it in a risky MBS or CDO investment, leverage it ten times, then they go bankrupt and get Nationalized by the Government.

This is a big reason for the Short Sale/Loan Modification bottle neck....its not the backlog of claims its the cluster F#$k being created by all of the cross insurance claims. Noone is left with capital to pay anyone...except Uncle Sam.

My Advice: Have an Attorney Draft a letter addressing the issue, and formally request the PMI insurance policy signed by the borrower at closing. This is basic black letter insurance fraud. Call the lender out on it and copy the letter to your states Insurance Division.

Thanks for this post. I guess I didn't fully understand PMI either - the word "insurance" throws folks off, especially to the people paying the premium. So in default, does the insurance company pay off the lender's loss? or does the bank eat the deficit?

Yes.....its funny ...the PMI was created before the 2000's where Wall Street began playing with fire.

PMI is just that, INSURANCE. So a 3rd Party insurance company is on the hook to pay the lender, when the lender takes a claim on the loss.

In a short sale dealing with PMI, the process is complicated because the insurance company is most likely AIG or an affiliate who was wiped out, and then recapitalized.

Insurance is a game....you submit a claim....they try to deny and then eventually settle.

However, your borrower's are enitiled to the benefits of the claim as well....and should under no circumstances pay a Note to the Insurance company for the loss they are taking. Thats called extortion and fraud.....they have a FIDUCIARY duty to process the claim and release the Debtor from the obligation, if the Lender has agreed to it.

Hire a lawyer and sue for insurance fraud.

Not saying if it is right, wrong or wise. I have a background in insurance, but not PMI. But it seems the insurance company insures the bank, not the homeowner. The insurance carrier and bank can recover damages from the defaulting homeowner subject to other laws of the state etc.

All the PMI companies have gone out of business except for a few. They are trying to recoup the money they loss.

Seems like everyone is on a witch hunt and the PMI companies are the flavor of the day. Don't look a gift horse in the mouth. Please review all the transactions that you have earned a fee from over the last 5 years and determine how many of those were funded with less than 20% down. PMI is and has been a good thing for home-ownership. Yes, these firms have made some errors in the products that they underwrote (Alt A - Payoption - etc) but everyone make mistakes.

Boy some of you folks are really aggressive on this stuff! I'm not an expert at PMI but someone did mention that it is for when the homeowner defaults - not short sale, etc. Seems like the bank is forcing the seller to say stuff it here are the keys. Then the bank is covered by PMI.

How long would it take 20K to be paid off at $100 a month BTW? Tell the bank to stuff it and take your licks on the credit report.

Can anyone prove to me that going into foreclosure is any worse than trying to push a short sale through concerning the seller's credit and their credit recovery times?

Hey Todd, great subject for a discussion. Overall, I think most of the comments were on point, but one of the things that I was surprised at were the number of people that had firm beliefs that if they had don an 80-20 instead of PMI, that would have solved the problem. It wouldn't have. You would be negotiating with the 2nd mortgage lender instead of the PMI company. Probably with less results.

PMI is there to assist someone purchase a home with less than 20% down. If the home is foreclosed and sells for less than is owed on it, PMI picks up (at least part) of the difference. Can you blame them for "loss mitigation" on a short sale? As for if a short sale is better or worse for a lender than foreclosure??? Personally, I think a short sale is often the worst choice for the seller unless they are very, very, very careful.

Great job generating a subject that is timely and very controversal. I agree, the one comment was off the wall, PMI is not something that is your scope of knowledge. I doubt very few loan officers knew what it actually did until recently.

One other issue, under the Obama Housing Stability Plan that allows refinancing homes that are upside down in value, if there is currently PMI on the loan, they can only be refinanced though the company servicing the loan and then only with the approval of the PMI company. Could be an issue.

I don't think PMI covers short sales, because they are voluntary. You'd have to check the documents related to the PMI your client is paying, but I think they only covers foreclosures. (The PMI your client purchased is to help prevent a loss for the lender, not an option purchased for your client to sell short.)

Very interesting topic, Todd, with lots of thoughtful comments. Can't wait to hear how it turns out!

Todd, I had a short sale like this.... My seller had done a no downpayment loan. The PMI company asked for $7,000. She agreed. Since she had NO money down into the deal she felt it better to pay back $7,000 than to owe $50K or more if the home foreclosed and they came after her later.

Bill, thank you for taking the time to clarify the bond vs insurance concept.

Todd,

Your readers should read Brian Brady's blog from almost 3 years ago:

http://activerain.com/blogsview/21257/a-realtor-s-guide-to-pmi-short-sales-

Bill

To the poster who made this comment 'I wish our real estate licensing courses dealt more with the real issues we face in our business each day' AMEN!

The most eye-opening part of this post for me is to realize how few are aware of the basics of PMI. Scary.

Todd, while I have not run into this yet, it sounds like the PMI insurance industry is trying hard not to absorb any loss at all. However, as we know, risk is inherent in business and as far as I know, this industry is "not too big to fail" so press on with your client's wishes and I will wish for your success.

Todd, don't understand why you keep referring to the bank as your villain when it's clear that the MI company is the one requesting the repayment.

Todd, Thanks for the information about your sellers situation. Just to make life a little more interesting I had some new information last week from my brokers mortgage affiliate. They told me my second home buyer, who didn't want to put the 20% downpayment on purchase, wouldn't be able to ,at this time, get a loan as the PMI wasn't available to a buyer wanting to purchase this way. I asked, when did this news take affect, and I was told several weeks ago. I haven't heard any discussion about this new event. Ah the rules keep changing.

Judy Genton,Realtor

Windermere Real Estate

Indian Wells, CA

Todd,

I was asking the same question until I found out exactly what Bill was saying in his comment. I really hope he makes that into his own blog because it's a great explanation.

It's the lender who takes out the policy not the borrower, the borrower is just the one paying the premiums. I think if more people understood it they wouldn't be so willing to sign on the line.

Todd - I have to admit that this post prompted a case of incurable professional curiousity. I have litigated a few guaranty cases. The law covering suretyship defenses can be extremely complicated and fact intensive. Changing terms of a note or releasing collateral results in an increase in risk and potential loss for the guarantor and gives rise to suretyship defenses based on the impairment of their subrogation rights. If anyone has a copy of a PMI policy or insurance agreement, I would be interested in seeing the provisions.

Hi Todd,

Just a note in connection to Judy's comment above. PMI is still available, although very limited in who can get it, for 2nd homes. I still have access, as of today, but as she said, the rules keep changing. Right now, only one company will write these policies and only to selected customers.

Great conversation.

Hi Todd, Nice informative blog! I will have to check out this pmi situation. thanks for sharing.

For the last 4 months, I have been working (with the listing agent) to get a short sale approved for my BUYER. The bank has accepted our offer but the PMI company wanted $10,000 from the seller to approve the deal. Seller does not have the money so we increased our offer hoping that the bank and PMI company can agree to resolve their differences. A new BPO was done last week and we are waiting to hear. I guess PMI companies asking for money is more common than I thought.

Sometimes I wonder if it is worth it to go through this process, shorten my life due to stress, and be asked by the bank to lower my fees!

Sadly, lost in most of the comments is the fact that someone is suffering due to a downturn in their local economy that was not of their doing. With as many people as there are going broke and losing homes...pretty soon a Fico score won't mean anything.

The vast majority of families who took out PMI did so on the advice of two primary sets of people they trusted...lenders and real estate agents. They were shown all kinds of stats that said their home was going to increase in value and then they could cancel it in 2 years if they had 20% equity.

And of course that was going to happen because of skyrocketing values...eh?

There were mega ads in every paper and on tv every week...builders specials...lender specials...move in specials...zero down loans...etc. all across the nation.

The buyer was duped. He/she was convinced by others that they could afford the new house and the new car and even the PMI to protect them.

So for those of you who say don't blame the banks, or the Private Money Ingestors...I say blame them for their fair share of making it so easy to get a loan. Blame the people that convinced everyone that going PMI was better than FHA or VA or 20% down.

If PMI is a bond and I do not dispute that at all...it should have been called that...so blame those that named it wrong and allowed it to be so confusing and convoluted. Blame the closer who never explained what buyers were signing.

Blame the corporate structure, the board, the stockholders, etc. that pressures every business to have 10% or higher annual increases in profits...so of course the banks, lenders, PMI providers do not want to absorb the loss. Blame the feds...pick a party...they all share in the blame.

But please...don't say it is the buyers fault because they didn't have 20% down...if it wasn't required, then why would they?

Todd, will you keep us posted on how this ends up? I also tangled at the final hour with MI on the second loan and the buyer wanted the house enough to pony up $6k. Seller could only muster $1k and we "rich" realtors kicked in a grand each to make it finally close. (after we had our commissions reduced to 2.5%)

Commentors have enlightened me about the features and purposes of MI. (thanks for the lessons) What I will keep top of mind as I negotiate on behalf of my short sellers in the future is the fact that MI was required BY the lender to protect the LENDER in the case of FORECLOSURE.

My personal opinion is that the LENDER needs to settle the deficiency with the MI co. I understand thanks to Bill, that it is in effect a "bond", but it was a bond paid for by the buyer to protect the lender. Right? I should have fought harder against any of us paying. If the house becomes a foreclosure, the MI co gets nothing, right? Bill how would you have handled a demand from the MI co for $15k to save the deal? And now Todd, in light of this sterling discussion, would you do anything different? Hmmmm?

JUL

Mike - You have got to be kidding. There is a little thing called personal responsibility. Lenders didn't force borrowers at gun point to sign up for a loan. They wanted to own and didn't have the money. So, PMI was a dream come true. It permitted them to purchase a new home with little or no money down. Where there cases of fraud? Yes. But, I don't buy the argument that borrowers were duped into purchasing PMI thinking that it insured the borrower in case of default.

SteveDinielli, when you stated there is a diff. to short sale and foreclosure, I agree that that makes all the difference with the PMI. I also think too that the bank and PMI may be communicating to get the best results for them because after all no one wants to lose large amounts of money. Sadly the owner is in a tough spot because he did sign his name to the contract agreement to PMI in order to purchase his home. But, I believe the real estate agent can be very helpful to the seller in negotiating a better outcome for everyone.

Years ago my husband and I bought a motel that was given back to the bank and sat vacant for 1 year. My husband went in to the bank with a very low offer, but convinced the bank that this was the best offer for them at that moment and how much longer would they want the motel vacant. They accepted the offer because it was better than nothing. When we went to sell the motel the courthouse records showed a lien on the motel from the old owner. Under great stress I found our contract and showed that we purchased the motel clear of all liens. I read through that contract serveral times before we signed it. We were in the right.

When I take buyers in to sign papers at the closing, it is overwhelming to almost all of them. They just want to get it over with and get the keys to the door of the house. If this has been a difficult subject for us realtors, including me, can you imagine what it is for the buyer. I seems very clear to me that PMI is not explained very well to a buyer from the mortgage loan officer. Now is it the realtors job to explain the finance part to the buyer. I don't want that responsiblity, but I can certainly encourage the buyer to ask the banker exactly what is does for them.

This was a great blog. I applaud Todd for bringing this up because all this communication between professional realtors is going to help us all become more informed and better at our job.

Bill, thank you for your wisdom also.

Thanks, William, for educating us on PMI ... Apart from that, however, I think people who are under water on their mortgage should be grateful that the lender is lettting them off the hook and that they're being asked for a comparatively miniscule repayment of what they borrowned to get the house.

Come on, folks, don't we insist on "personal responsibility" with our children? I have of course done a number of short sales, and I always let my sellers know that I am grateful, on their behalf, that the lenders are not coming after sellers for the full amount of the personal loan that every buyer in NJ has to sign when he takes a mortgage.

Short Sales are a nightmare for most Realtors and Lenders and sellers. But there is no reason for sellers to slap the face of the people who are letting them slide on what is, in fact, the sellers' responsiblity.

We really need to change the "entitlement" philosopy that seems so prevalent these days.

Forget moral hazards. We're talking about our economy and OUR industry, not to mention people's lives. This is why short sales need to be streamlined already! Mark my words, short sales will be the answer to a better recovery. Without them, too many people will be upside-down and stuck. I'm not saying the banks and investors need to take the bullet for every house that is upside down, but they still are playing hardball with the people that really need a short sale. And usually its the people that care about doing the right thing that want to short. The people that don't care give the banks the big "F" word. FORECLOSURE.

Kathrine,

It depends!

I am a fiduciary for my client, I'd do what's best for the client!

Personally I like playing hard ball see comment #10.

Keep in mind the bank is your problem not the PMI company.

Bill

Thank you all for the kind words, I'm humbled.

that's unreal. It's another case of the insurance companies trying to get out of the claim, or the bank not wanting to make a claim. I wonder if the insurance company even has enough funds to handle these.

PMI= Primate Mortgage Insurance,

It is meant to help pay the loss to the Bank. Not the borrower. THE BANK.

Ryan, I tried to get a copy of the policy from the lender. I even had my Regional VP try to get a copy. The response from the lender was that the home owner had no right to a copy of the policy. They provided a page showing that the house was covered under the master policy, that the borrower was paying the specified fee, but nowhere was there anything that disclosed the terms to which she would be held.

She did not sign any application or acknowledgement that she had even been told what PMI is or what her liability would be in case of default.

To demonize the buyers as at fault here makes as much sense as demonizing the parties after a divorce. No one in these situations was trying to get out of paying their rightful obligations at the time they bought their properties. Mike is absolutely correct, there are a lot of people in pain. But when they were working, bringing in the money, there was no intent or thought of default. And there are still many people who got these same kind of loans, who haven't lost their jobs who are paying right on time and grateful that they had the opportunity to get into a home. Should they not have had the opportunity because some others were going to have problems? The situation was not in anyone's control. But now the banks are looking to shore themselves up on the backs of the people they were more than happy to have as clients in the first place.

JUL

Jose had it right. PMI is to protect the bank, not the borrower, and of course they are looking to subrogate any loss. Just as the bank does not have to accept the terms of a short sale, why should the insurance company have to accept a bad deal for them? They don't, simple as that. And just realize, if the buyer just "gives" the house back to the bank, the bank is going to sell it to some vulture, I mean investor for peanuts and then they can come back after the borrower for a deficiency judgment. If there is any way to meet the bank half way, it might be good to negotiate. A no interest loan may beat the alternative.

JUL

Pamela made a good point that buyers are often overwhelmed by all of the paperwork they have to sign at closing. Most buyers are not mortgage or real estate professionals, so they often times don't understand everything they're signing. They're emotionally attached to the transaction (excited about their new home or what they're going to buy with the money they're saving on their refinance). Closing agents rarely explain the paperwork adequately to the buyers.

When I refinanced my primary residence a couple years ago, the closing agent told me, "I'm not trying to rush you, but you do have a three-day right of rescission if you read over the paperwork when you get home and decide you don't agree with the terms." She was essentially telling me just to sign the documents now and read them when I got home so she could meet with the next client. I told her that if I didn't read everything at the closing table, I wouldn't get around to it later. While reading through the documents, I found two errors and over $3000 in additional fees that were thrown in. I brought those up to the closing agent and refused to continue until the corrections were made. She called the loan officer, and the loan officer made the changes and had the corrected paperwork over to the escrow company within 30 minutes. If I hadn't stayed to read everything (which took me nearly an hour), I would have ended up paying an additional $3000 and may not have ever realized it. I always try to be at closing with my buyers or sellers whenever possible, and I help walk them through all of the paperwork without being rushed by the closing agent.

My long-winded point is that it's human nature for buyers to be overwhelmed and confused when presented with a stack of paperwork at closing. They're typically not trained to think like an attorney or real estate agent, and they're often thinking very emotionally, so it's not difficult for someone to get duped into signing paperwork that they don't fully understand. (This doesn't apply to buyers that intentionally lied on a loan application or otherwise committed fraud.)

JUL

I agree with everyone who said that PMI is there to protect the lender in case of default, not the buyer/owner. I read an article recently that said Bank of America is starting to include an owner "promissory note" term in their short sale acceptance letters. Hopefully this isn't going to become the norm in short sale deals. If it does, then the main reason for an owner to pursue a short sale, rather than let their property go into foreclosure & risk a deficiency judgement, will become a moot point!

JUL

I have ran into the short sale situation that if the bank is getting less than 80% and there is mortgage ins, the bank will let it go to foreclosure to collect the ins.

JUL

Wow. That brings up a good question. When the banks are covered for foreclosure, what kind of coverage or payout amount do they get when the foreclosure happens? Do they actually get a significant payout if the home goes into foreclosure? Anybody know?

JUL

Tatyana, I had a short sale approved recently where the lender accepted 60% of the principal balance, and the lender was covered by PMI (and the PMI company agreed to pay the loss claim).

Lenders can get payouts from PMI whether the property is sold as a short sale or at a foreclosure sale. PMI policies can be purchased with different coverage amounts. I believe that a lender's decision to let a property go to foreclosure rather than accepting a short sale is just a question of which situation would cause them to lose less money, and that may be tied to what the PMI company will approve.

It's also my understanding that the lender won't get paid from their PMI policy until the house is actually sold (through a short sale, foreclosure sale, or as an REO). Can anyone else confirm that? The lender wouldn't know what their actual loss is until it is completely off their books, so how could they get paid on a PMI claim when they don't know the amount of the loss?

NOV

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