Special offer

PMI, The Mortgage Industry’s Dirty Little Secret

By
Services for Real Estate Pros with Real estate commentator; GoToby.com, Take Action Propertiesi

Private Mortgage Insurance (PMI) has long been touted as a benefit that allows borrowers to purchase property with less than a 20% down. But who is the real beneficiary of PMI? We are all told that PMI is insurance that pays the lender if we default on our mortgage. While true, this does not tell the whole story. There is a lot that we are not told.

If PMI is a condition of a mortgage, here is what the lender must disclose:

  • As part of a "good faith" estimate of closing costs, the lender must provide an estimate of the PMI premium.
  • At closing and annually thereafter, the lender must notify the borrower of available cancellation options. In most cases, PMI may be cancelled when the mortgage is paid down to 80% of the lower of the selling price or the original appraised value. It will usually be cancelled automatically when the amortization of the loan takes the mortgage balance down to 78%.

Among the things most people do not know: 

  • The borrower is not a party to the mortgage insurance policy. The lender does not have to disclose either the name of the insurer or the amount of the insurance purchased. Yet the buyer typically is responsible for the premiums.
  • Lenders can purchase protection for up to 30% of the mortgage amount without disclosing to the buyer any more than the premium. For example, you buy a $200,000 home with a 10% down payment of $20,000, financing the balance with an $180,000 mortgage. The lender can protect up to 30%, or a total of $54,000, with mortgage insurance with the buyer paying the premium.
  • The PMI insurer can pay anyone along the transaction line for services rendered that either reduce the risk of the loan or reduce the insurance company's expenses. This implies that they can pay commissions to the lender. Understand that it comes out of your pocket.
  • The monthly premium for most PMI is fixed. In other words, as the balance of the mortgage declines, presumably along with the risk to the lender, the borrower continues to pay the same premium based on the risk assessment at the time the loan was originated.
  • While many lenders will consider allowing the buyer to cancel PMI when the value of the property rises so that the 80% loan to value ratio is achieved, they are under no obligation to do so. In my experience, the lender required that I pay for an appraisal done by an appraisal company selected by the lender. Also, the borrower must usually provide proof there is no second mortgage on the property. Cancellation may require a waiting period and a good payment history.
  • The lender can purchase PMI, for which they pay the premiums, without notifying the borrower. Funds for these premiums may come indirectly from the borrower in points or increased interest.

PMI premiums are not insignificant. I looked at a loan statement for one of my recent investment properties. On a loan of approximately $200,000, the monthly principal and interest payment was $1,124.93. The monthly PMI was $163.53, or 15% of the P&I. Yet I never knew how much insurance this was buying or from whom. Had I carried this property the 10 or so years requried to reduce the mortgage balance to 78% of the purchase price, I would have paid over $19,000 in PMI premiums (nearly 10% of the original loan amount).

In the many recent articles on the subject, borrowers are urged to contact their lenders immediately when they run into financial trouble or feel they will be unable to keep their mortgage payments current. They stress that working out an arrangement with your lender is far better than going through foreclosure. Even if foreclosure is inevitable, industry sages recommend working with the lender to facilitate a "short sale," where the selling price is less than the mortgage amount, thus avoiding the stigma of a foreclosure.

Do you think the fact that the lender is protected with a PMI policy will make them more or less likely to work with the borrower? Why would they offer the buyer extended or more favorable terms or allow a short sale when they need only foreclose to collect their insurance? Isn't it ironic? You could have paid thousands for coverage that helped pit your lender against your best interests. "A banker is someone who will loan you an umbrella, but who wants it back when it rains," said my father.

Toby Tobin is Editor & Publisher of GoToby.com, the popular real estate news, information, and analysis website for the City of Palm Coast, Flagler County and Northeast Florida

Comments (23)

Jeff Kessler
Austin Homes, Realtors www.OwnAustin.com - Austin, TX
Broker,CLHMS,GRI

Very good post.  Great incite about PMI.

J.

 

Oct 30, 2007 02:46 AM
David Conaway
MetLife Home Loans - Bethesda, MD
I think you will see more PMI than less in the coming months and years.  Banks are moving slowly from HELOCs and seconds and adopting the FHA model of up front PMI or building it into to the rate (no MI options are typically .375% above the existing market rate).  With up front PMI the borrower can get a loan above the 80% LTV (normally 90-95%) and have the seller paythe PMI.  One of he big issues with PMI in the past was you couldn't deduct the %.  Now you can in most cases which brings me back to the trend.  Out of all the high LTV conventional loansI've done over the last 6-7 years, maybe 2% had PMI and the rest were piggybacks (80/10, 80/15, 80/20).  Today I'm seeing fewer piggy-backs and more financed and up front PMI options.    
Oct 30, 2007 02:53 AM
Brandon Causey
Coastal Palmetto Realty LLC - Loris, SC
Realtor, Coastal Palmetto Realty LLC

I understand PMI in a nessasary enemy, but I still don't like the fact that the banks don't have to disclose some of the facts you stated in your post.  Thanks for the info.

Oct 30, 2007 02:59 AM
Find a Notary Public needAnotary
QEC Internet Services - Long Beach, CA
Very insightful and relevant post!    
Oct 30, 2007 03:01 AM
David Conaway
MetLife Home Loans - Bethesda, MD
One other note is that on most of the upfront PMI options you can be reimbursed a pro-rated portion of the premium similar to FHA.  So you have the seller pay the PMI upfront, borrower holds the loan for 2 years, they refinance, and the buyer gets back 68% of the premium paid by the seller.  As for disclosure, I agree with you, transparency is where the entire industry needs to move towards.  Benefit of the upfront option, what you see is what you get.  I don't work for PMI and I don't get any income or incentives from them.  Well.....maybe a pen.
Oct 30, 2007 03:18 AM
Bill Roberts
Brooks and Dunphy Real Estate - Oceanside, CA
"Baby Boomer" Retirement Planner

Toby, I'm a mortgage broker and I found your analysis to be very useful. I can only imagine how this must have opened the eyes of a few others out there.

A piggyback (80/20) is one way to avoid the mortgage insurance but the higher cost of the second often more than off-sets the cost of the PMI. When a borrower gets a high risk loan, they've got to expect to pay a premium for it. I would suggest that they re-fi just as soon as they can (after the pre-payment penalty expires) to get out from under the PMI.

I've bookmarker this post for future reference so I hope you don't take it down.

Bill Roberts

Oct 30, 2007 04:52 AM
Toby Tobin
Real estate commentator; GoToby.com, Take Action Propertiesi - Palm Coast, FL

Bill,

I understand the need for PMI. My problem is that it occurs behind closed doors, where the borrower can't see what's going on. They are disclosed only the premium amount. They have no knowledge or say in what type and amount of MI is purchased or from whom. Neither are they privy to alternative premium or coverage options. The policy and insurer are selected by the lender, solely for their own benefit. In fact, the type and amount of insurance  payable to the lender can potentially work against the borrower should they need a loan work-out or short sale alternative when facing a foreclosure. In a time when practically every eventuality has to be disclosed, the lender's lobby has done a great job of keeping this under wraps.

Oct 30, 2007 05:17 AM
Esko Kiuru
Bethesda, MD

Toby,

It's understandable that lenders like to be covered on loans with less than 20% down. It's the basic risk factor. But the fact that they don't need to disclose everything associated with a PMI is highly questionable. Good information.

Oct 30, 2007 05:42 AM
Bill Roberts
Brooks and Dunphy Real Estate - Oceanside, CA
"Baby Boomer" Retirement Planner

Toby, If you read my posts you will see that I am anything but a lackey for the banks, but I think that in this case they are right. They are buying the coverage they feel they need in order to make a high risk loan. The fact that it is a surcharge to the interest rate is only a marketing ploy. The rate could just as easily include the risk insurance then your argument re: transparency goes away. It is their cost and their benefit, it is just part of the overall cost of the loan.

As for compromising the borrowers options for a workout or short sale, so what? The lender doesn't owe that to the borrower. If the borrower can't or won't pay, the lender has the right to mitigate their losses.

Bill Roberts

Oct 30, 2007 07:00 AM
Toby Tobin
Real estate commentator; GoToby.com, Take Action Propertiesi - Palm Coast, FL

Bill,

Good points. However, I think most borrowers do not have any idea that different types and amounts of insurance are available (at different costs). They believe that, since PMI is required, they have to pay "the going rate." In fact, different lenders may elect different coverage at different rates. I'd prefer to see the risk insurance reflected in the rate. That way, borrowers can make apples to apples comparisons. The real test is disclosure. Banks wanting more protection would be likely to have a higher rate. If the lenders really thought they were being upfront, they would disclose the details. I was very surprised to find that lenders can buy protection for 35% of the loan amount. If you Google "how much does PMI pay lenders?" you dont't find this out.

I appreciate your comments.

Oct 30, 2007 07:44 AM
David Conaway
MetLife Home Loans - Bethesda, MD

 "I was very surprised to find that lenders can buy protection for 35% of the loan amount. If you Google "how much does PMI pay lenders?" you dont't find this out."

You actually can...and coverage can go beyond 35%.

http://www.google.com/search?hl=en&safe=active&sa=X&oi=spell&resnum=0&ct=result&cd=1&q=mortgage+insurance+companies&spell=1

"The fact that it is a surcharge to the interest rate is only a marketing ploy. The rate could just as easily include the risk insurance then your argument re: transparency goes away."

It's risk based pricing.  If you don't want a monthly MI you have options:

1.  Put 20% down

2.  Do a piggy-back 2nd mortgage

3.  Finance it into the loan (680 score, 95% ltv will add .375% to the rate)

In an appreciating market it's much easier to argue the fairness of MI.  As a lender I fight to get the coverage down if I have to use MI.  I gain no adavantage and in fact it limits the amount of money I can lend.   As for what  the coverage is driven off of: program (ARM or Fixed), doc type (stated/full/no doc), credit score, and LTV.  More risk, more coverage.  You can go to any of the providers provided in the link and see the rates or you can ask your lender what coverage is required and what the cost will be.  Either way, this is solely for the bank and not for the borrower.  As to why all don't just price it into the rate?  I think the lenders don't want to carry the high risk debt on the books without a bailout (MI).  Makes sense.

 

Oct 30, 2007 08:13 AM
Bill Roberts
Brooks and Dunphy Real Estate - Oceanside, CA
"Baby Boomer" Retirement Planner

Toby, This subject is very interesting to me. I just posted on my blog about it and referenced this post. You can check it out here: Who Has a Right to a Short Sale?

Thanks for the inspiration.

Bill Roberts

Oct 30, 2007 08:29 AM
Toby Tobin
Real estate commentator; GoToby.com, Take Action Propertiesi - Palm Coast, FL

Dave,

All good points, but the bank can buy the coverage themselves and bury it in the rate just as they do with other costs, such as rent, the CEO's salary, etc.  That way, the borrower can compare rates and the bank still has a bailout.  I learned a long time ago that whenever someone had their hand behind their back, there was something they didn't want me to see.

Toby

Oct 30, 2007 08:37 AM
Ethan Dozeman
Realty Executives Platinum Group - Grand Rapids, MI
Real Estate in Grand Rapids
Now for most homeowners when they take out PMI it is a tax deduction taken just like the Interest deduction, correct?
Oct 30, 2007 02:31 PM
Toby Tobin
Real estate commentator; GoToby.com, Take Action Propertiesi - Palm Coast, FL

Ethan,

PMI premiums are deductable only if the loan closed in 2007 (for taxes filed in 2008). For adjusted gross incomes less than $100,000, the entire premium is deductable. For incomes between $100,000 and $110,000 a portion of the premium is deductable. For incomes over $110,000, there is no deduction.

Toby

Oct 30, 2007 02:40 PM
Lisa Hill
Florida Property Experts - Daytona Beach, FL
Daytona Beach Real Estate
Good post Toby. I didn't realize we had another Adams Cameron agent on here until this afternoon, when John showed the AC group during a meeting. That's what I get for not ever looking in the group folder. I'll subscribe to your blog so I can be sure to comment when you do any Localism posts. It supposedly helps boost your search engine positioning.
Nov 05, 2007 10:00 AM
Toby Tobin
Real estate commentator; GoToby.com, Take Action Propertiesi - Palm Coast, FL

While a few comments support the practice of PMI, none refute the facts. Most buyers are overwhelmed with the mass of forms signed at a typical closing. They're just happy to buying a home. They don't understand what's going on behind the scenes and they should. How can one justify the fact that a lender might recover more than their actual loss from the proceeds of a PMI policy, in some cases without the knowledge of the defaulting borrower, then pursue a deficiency judgment against that same borrower? And the borrower paid the PMI premium.

May 24, 2008 01:07 PM
Anonymous
Amanda Epperson

Thank you for the info.  I am single mom, laid off since January 2009.  Separated from husband since 10-2007, he lost his job 4-2008 due to drugs/DUI. No child support.

I started contacting mortgage company in Sept. 2008- that I was starting to have difficulties and would run out of savings January 2009.  Because I was not behind and had an exellent payment history they would not discuss.   Payments made on time until January (out of pride) and then laid off at the end of January.  Full month of unemployment benefits would not cover the monthly mortgage/escrow. In March. all "litigation" paperwork filled out and sent in as they requested.  Consumer Credit Counseling reviewed my budget and reported to them, I had cut all possible expenses. Unemployment rates at 8.3% in our area at that time, worse now. 

I was given a "repayment" plan to pay one half of the payment ($1274.00/ $637.00) for 6 months (April to August).  What I did not understand apparently was, that was repayment for the 3 months I was behind and the full amount for each month was also still due. ($1911.00 total)  I did not catch on until I received notice that they were concerned that I was still behind- Nothing had changed on my income. $1199.00 per month.

NOTE: I asked when told about the $637.00, would that be applied to the escrow account too:  PMI, taxes and home owners insurance?  I was told yes.  But I was also told that the $637.00 payment would not show up on my monthly statement- It does not, but it did show up as a miscellaneous payment on the "online" account.   I had paid April and May ($637.00).  I asked to speak with my "assigned Counselor" I was told she was emailed and would call me. (2 weeks ago)

On the online accouting it shows a (-363.00) negative in escrow.  Do you think they are paying the PMI?   I was contacted by letter,by the PMI insurance carrier in April and they said that if I had made arrangements with the lender, to disregard their contact.  SHOULD I CONTACT THEM?

I have the house on the market, but when my estranged husband refinanced in 2006, the appraisal was extremely inflated (I saw it recently).  There has never been a house in our neighborhood that sold for this amount and ours is the smallest......AND it backs up to a major interstate "on ramp", only one of the many selling obstacles.  He put all of his credit cards on the refinance and did not cut them up afterwords.  I ran the house on "cash" and paid the "new" credit card bills on time, until our separation. The current payoff is $169,000.00 on a house we orginally contracted for $125,000 and we have paid on for over 8 years.    

My "soon to be" realtor has short sale training and experience, but it is difficult to trust anyone now, as it seems that people only tell you just enough to benefit themselves.  I am trying to learn but seem to be two steps behind and don't know which way to go.  Any suggestions?

Kind Regards,   Amanda

 

 

 

 

 

 

 

 

Jun 20, 2009 05:14 PM
#22
Anonymous
Amanda Epperson

Thank you for the info.  I am single mom, laid off since January 2009.  Separated from husband since 10-2007, he lost his job 4-2008 due to drugs/DUI. No child support.

I started contacting mortgage company in Sept. 2008- that I was starting to have difficulties and would run out of savings January 2009.  Because I was not behind and had an exellent payment history they would not discuss.   Payments made on time until January (out of pride) and then laid off at the end of January.  Full month of unemployment benefits would not cover the monthly mortgage/escrow. In March. all "litigation" paperwork filled out and sent in as they requested.  Consumer Credit Counseling reviewed my budget and reported to them, I had cut all possible expenses. Unemployment rates at 8.3% in our area at that time, worse now. 

I was given a "repayment" plan to pay one half of the payment ($1274.00/ $637.00) for 6 months (April to August).  What I did not understand apparently was, that was repayment for the 3 months I was behind and the full amount for each month was also still due. ($1911.00 total)  I did not catch on until I received notice that they were concerned that I was still behind- Nothing had changed on my income. $1199.00 per month.

NOTE: I asked when told about the $637.00, would that be applied to the escrow account too:  PMI, taxes and home owners insurance?  I was told yes.  But I was also told that the $637.00 payment would not show up on my monthly statement- It does not, but it did show up as a miscellaneous payment on the "online" account.   I had paid April and May ($637.00).  I asked to speak with my "assigned Counselor" I was told she was emailed and would call me. (2 weeks ago)

On the online accouting it shows a (-363.00) negative in escrow.  Do you think they are paying the PMI?   I was contacted by letter,by the PMI insurance carrier in April and they said that if I had made arrangements with the lender, to disregard their contact.  SHOULD I CONTACT THEM?

I have the house on the market, but when my estranged husband refinanced in 2006, the appraisal was extremely inflated (I saw it recently).  There has never been a house in our neighborhood that sold for this amount and ours is the smallest......AND it backs up to a major interstate "on ramp", only one of the many selling obstacles.  He put all of his credit cards on the refinance and did not cut them up afterwords.  I ran the house on "cash" and paid the "new" credit card bills on time, until our separation. The current payoff is $169,000.00 on a house we orginally contracted for $125,000 and we have paid on for over 8 years.    

My "soon to be" realtor has short sale training and experience, but it is difficult to trust anyone now, as it seems that people only tell you just enough to benefit themselves.  I am trying to learn but seem to be two steps behind and don't know which way to go.  Any suggestions?

Kind Regards,   Amanda

 

 

 

 

 

 

 

 

Jun 20, 2009 05:14 PM
#23
Anonymous
lk

nice one wierd-o

Apr 17, 2011 11:08 AM
#24