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Private Mortgage Insurance Companies are Insuring Worthless Zero Equity Second Mortgages for Banks and It Is Costing Taxpayers Big Time

By
Real Estate Agent with Elizabeth Anne Weintraub, Broker DRE #00697006

Did your bank take out mortgage insurance on your second mortgage? You might think it doesn't matter because your bank is paying the premium and not you, but banks are hedging their bets and it's costing you money. In fact, you probably don't even know that you have mortgage insurance on that second mortgage. The bank is not required to tell you.

I wrote a blog last month about Bank of America's silent mortgage insurance on second mortgages. At the time, I thought it was an anomaly. Quirky. Weird. Because typically banks insure first mortgages and generally a borrower pays for it. I wondered if these mortgage insurance policies were taken out at inception of the loans, but I am inclined now to say no. I'm seeing too many of them.

It's obvious to me that the banks are taking out these mortgage insurance policies after the fact. At first glance an observer might wonder whether a bank is committing fraud by insuring a worthless asset. But when you think about it, it's happening on such a wide scale, there is actually a product in the marketplace for banks to buy. This means it is profitable for a mortgage insurance company -- at least in the short run -- to offer insurance against a mortgage without equity.

What?

How can a mortgage company make money by insuring thin air? You may as well ask why isn't Wall Street in jail? But I am thinking that this is simply the tip of the iceberg. The reason you don't hear about mortgage insurance schemes on second mortgages in other channels of news is because nobody realizes this is happening.

I see this happening because I am a Sacramento short sale agent. Many agents might close 2 or 3 short sales a year, if that. I close a ton of short sales. I would see a trend emerging before anybody else. It wasn't until this year that mortgage insurance on second mortgages started to pop up in short sales. Coincidinky? I think not.

In fact, just yesterday I was informed by Aurora Bank of an 11th-hour demand from a mortgage insurer. This is on a file in which we have short sale approval letters from both Aurora lenders. Not only has Aurora approved the short sale, but it has approved the final HUD. When I asked the negotiator for Aurora who would pay the $7,500 mortgage insurance demand on a file that might have already closed, he told me it would probably have to come out of Aurora's net proceeds.

That's an idea, huh? Make the bank pay the MI demand. When pigs fly.

I'm telling you, there is something rotten in Denmark. Banks sold these 80 / 20 combo loans to borrowers on the premise that there is no mortgage insurance. Now, homeowners with lender-paid mortgage insurance on a second mortgage can't do a short sale without paying the MI company. How is this not some sort of fraud? Moreover, in California, it violates SB 458.

I am contacting a few reporters and legislators today. If you think something is fishy as well, you might want to pass this blog along to a few interested parties, too.

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Elizabeth Weintraub is co-partner of Weintraub & Wallace Team of Top Producing Realtors, an author, home buying expert at The Balance, a Land Park resident, and a veteran real estate agent who specializes in older, classic homes in Land Park, Curtis Park, Midtown, Carmichael and East Sacramento, as well as tract homes in Elk Grove, Natomas, Roseville and Lincoln. Call Elizabeth Weintraub at 916.233.6759. Put our combined 80 years of real estate experience to work for you. Broker-Associate at RE/MAX Gold. DRE License # 00697006.

Photo: Unless otherwise noted in this blog, the photo is copyrighted by Big Stock Photo and used with permission.The views expressed herein are Weintraub's personal views and do not reflect the views of RE/MAX Gold. Disclaimer: If this post contains a listing, information is deemed reliable as of the date it was written. After that date, the listing may be sold, listed by another brokerage, canceled, pending or taken temporarily off the market, and the price could change without notice; it could blow up, explode or vanish. To find out the present status of any listing, please go to elizabethweintraub.com.

Comments(10)

Melissa Zavala
Broadpoint Properties - Escondido, CA
Broker, Escondido Real Estate, San Diego County

I'm somewhat pleased to see that I am not the only one having these problems--except that I am not pleased that these problems exist. Thanks for sharing your experiences. 

Aug 23, 2011 02:41 AM
Lisa Von Domek
Lisa Von Domek Team - Dallas, TX
....Experience Isn't Expensive.... It's Priceless!

Great blog Elizabeth,

The government and the big banks are always up to something fishy...they just don't think any of us are smart enough to figure it out.  Thanks for sharing this information!

Aug 23, 2011 02:41 AM
Mike Morrison
Will & Will Real Estate Brokers, The Woodlands, Texas - Houston, TX

You asked ..."how can banks make money out of thin air ?...". The same way they do with CDO's, CDS,MBS and CREMBS. Until... the house of cards begins to fold.

 Elizabeth, you get this, most folks don't. We are seeing the "Big Unwind" of all these counter party risk scheems. Sad thing is no one will go to jail....

Aug 23, 2011 03:57 AM
Elizabeth Weintraub Sacramento Broker
Elizabeth Anne Weintraub, Broker - Sacramento, CA
Put 40 years of experience to work for you

It blows me away, Melissa, that there is a way for insurance companies to make money by insuring something that does not exist. Those mortgages have no security for them, no equity protecting those promissory notes. The banks know it and the mortgage insurance companies know it.

Hi Lisa: I wouldn't say they don't think that we are smart enough. I'd say they are ambivalent.

Hi Mike: I know that some mortgage insurance companies have gone out of business because I've seen some short sales that once had MI and no longer do. Without explanation, either. The sellers are still paying MI but there is no MI. Explain that one!

Aug 23, 2011 04:07 AM
Cindy Jones
Integrity Real Estate Group - Woodbridge, VA
Pentagon, Fort Belvoir & Quantico Real Estate News

Elizabeth-this is just another example of how banks and lenders were allowed to run unchecked by any regulatiions in the name of profit.  The demands from these PMI companies are out of control in relation to the market value and when thrown into the pot at the 11th hour can tank a sale in an instant.

 

Aug 23, 2011 04:44 AM
Barb Van Stensel
Chicago, IL

Bank of America made money when they bought Countrywide.  The loans were insured for full money yet BofA purchased them at 50% of the value.  Then they got insured again for the loss they took, reimbursed for expenses when they sent them to foreclosure, bought them at the sale, got reimbursed for loss and then made money when they sold them again. 

Had this happen on a file and it's like no accountablity, no evidence but one can see an "oh well" .. yeh, right!

I've been talking about this for four years re Mortgage and PMI schemes.  And bottom is, we spend tons of money investigating these turkeys who created this mess and nobody will serve time.  Yet, they want to come after the Realtor who understands, can close these nasty sales.

 

 

 

 

Aug 23, 2011 04:57 AM
Mike Morrison
Will & Will Real Estate Brokers, The Woodlands, Texas - Houston, TX

Elizabeth- If a MI or monoline co. goes out of business, the premium SHOULD go to the State Appointed Receiver in the failed MI Co's state of domicile. Now, you know & I know that is not happening. I'll take a wild stab and say the mortgage servicer has kept the premium & is drawing interest on that premium.

This isn't the first time a MI Co. has folded. But, you'll hear the excuse; Well we didn't have a method in place to forward the premiums to a state or Oh, let us check and we'll get back to you.

What we REALLY need to worry about are the chain of title issues that are looming.

Aug 23, 2011 09:25 AM
Linda K. Mayer
License # 01767321 - La Verne, CA
Realtor, SRES, SoCAL, A REALTOR YOU CAN TRUST

This is interesting, Elizabeth.  I'm going to email to my broker and see what we end up seeing in our neck of the woods.  Thanks!

Aug 23, 2011 09:40 AM
DeeDee Riley
Lyon Real Estate - El Dorado Hills CA - El Dorado Hills, CA
Realtor - El Dorado Hills & the Surrounding Areas

I'm with you Elizabeth, in that something's not right here.  Add it to the list!!!  Thanks for sharing!

Aug 23, 2011 03:36 PM
Elizabeth Weintraub Sacramento Broker
Elizabeth Anne Weintraub, Broker - Sacramento, CA
Put 40 years of experience to work for you

We agents see such a small portion of what actually goes on behind the scenes in these short sales. But when I spot something, I'm going to say something. That's because if I don't, it would make me part of the problem, and I don't ever want to be part of the problem. I'd much rather be part of the solution.

Aug 24, 2011 01:55 AM