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.
Comments(10)