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Why Are the Big Banks Silent About Those Silent Mortgage Insurance Policies on Short Sales?

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

I received an email this morning from a member of Active Rain in Florida. She says I am the only agent she could find who talked about silent mortgage insurance on short sales. You know, the banks that take out a mortgage insurance policy, generally on a second mortgage, years after escrow closes and don't tell anybody about it. The banks pay their own premiums.

Homeowners have no say in the matter, but they're the ones who suffer when the mortgage insurance company messes up or refuses their short sale. Personally, I wonder why the MI companies aren't sued or the banks who took out the policies. After all, it's the banks who sold the concept of an 80 / 20 combo loan to the borrower in the first place. Part of that "gilded package" included the inducement that there was no mortgage insurance.

Yet, after closing, the lender slaps on a mortgage insurance policy. I'd say the borrower didn't get what the borrower bargained for, wouldn't you? It sounds fraudlent to me, but I'm not the FDIC or the newly formed FTC Bureau of Consumer Protection. I'm just a Sacramento short sale agent. Although, as a side note, I heard yesterday that the California DRE is slipping under the BCP. How do you like those apples?

This agent in Florida said she tried to do a Bank of America Cooperative Short Sale but was rejected. The reason for rejection was because Bank of America had put a silent mortgage insurance policy on the second loan. There was a first and a second with Bank of America. The MI company said no to the cooperative. So, she went the traditional short sale route. During the process, Bank of America sold the loan to Greentree. Part of the negotiation involved a seller contribution and the banks issued a release of liability on both loans at closing.

Her questions were where did the mortgage insurance policy go -- and was her seller released? The contribution could have gone to the MI company, we'd never know. And since the seller did not contract for the mortgage insurance, I don't know how the seller could be held liable after the fact. But I am not a lawyer and Florida has weird laws.

I also imagine the monthly premium stopped when Greentree bought the loan, which is what I told her. But the bigger question is how does the mortgage insurance company make a product profitable to issue and insure a worthless loan? Moreover, how and why is it profitable for a lender to sell a worthless loan? Why would another lender buy a worthless loan? How are companies making all of this money on a loan that has no security or value? You know who buys a lot of those loans? Seterus. Who used to be LPBS, who used to be IBM. For those of you who still remember typewriters . . .

Mortgage insurance companies are making out or they wouldn't sell the product. The second lenders who sell those worthless pieces of paper are making out. And the companies that buy them are turning a profit. How is this happening? What kind of accounting is this? Does anybody know or even care?

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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 (7)

Katerina Gasset
The Gasset Group & Get It Done For Me Virtual Services - Provo, UT
Amplify Your Real Estate & Life Dreams!

Suggested. Florda has weird laws? Maybe we think California has weird laws ;). 

She is released from all liabilities IF the approval letter says that the lender surrenders their rights to deficiency judgment. Many agents and sellers in Florida think that getting release of lien language in their approval letter is enough but it is not because we are a deficiency state and the two do not have to go hand in hand. 

However, all the attorneys we know say they have not seen ANY first mortgages going after the sellers and they have 5 years to file a motion for judgment in court here. So if 5 years passes which for the first round of short sales that happened in 2007 it will be the end of 2012 to see if the banks are going to pursue these judgments. I doubt it with the national outcry that is so anti-bank right now. 

However, on seconds, you betcha they are going after the deficiencies. That is a whole other discussion. 

Greentree is horrible. That is the nicest word I can find in my vocabulary right now for those creeps. Katerina

Jan 11, 2012 01:08 AM
Elizabeth Weintraub Sacramento Broker
Elizabeth Anne Weintraub, Broker - Sacramento, CA
Put 40 years of experience to work for you

Hey Katerina: You gotta admit that Florida laws are very different from the rest of the nation. Texas has some strange laws as well, LOL. It's all what you are used to.

We have a similar situation for first mortgages on short sales in CA prior to 2010. I'm not seeing banks pursue first mortgages either, at least not in appellate court. I have heard of a few calling sellers after closing and asking how they plan to pay the balance -- at least they weren't my short sales.

I don't mind Greentree. I find they listen to reason. That's a whole 'nother blog.

Jan 11, 2012 01:23 AM
Michael J. Perry
KW Elite - Lancaster, PA
Lancaster, PA Relo Specialist

The after settlement purchases of Lender MI is a whole new twist I hadn't considered on some of the 2003-2007 produced 80/20 loans !

Jan 11, 2012 01:54 AM
Elizabeth Weintraub Sacramento Broker
Elizabeth Anne Weintraub, Broker - Sacramento, CA
Put 40 years of experience to work for you

Don't you find it odd, Michael? That the very selling point that pushed borrowers into taking out the 80 / 20 combos was reversed after closing without their permission?

Jan 11, 2012 01:59 AM
Martin E. Kalisker, Esq.
Natick, MA
Real Estate Law From A Practical Perspective

This is certainly an area that the industry needs to address.  Too many short sale negotiations get stalled because of the silent mortgage insurance policy.  I just witnessed a transaction where the second lien holder rejected the primary's offer of $3,000 under a FNMA first lien, only to find out that the second wanted $11,000 which was what the silent mortgage insurer wanted.  This was obviously a non-starter because the primary wouldn't allow the seller to contribute to the second because that extra cash belonged to the primary to reduce their deficiency!

Jan 11, 2012 02:04 AM
Katerina Gasset
The Gasset Group & Get It Done For Me Virtual Services - Provo, UT
Amplify Your Real Estate & Life Dreams!

The note owners ( investors) do have the right to protect their assets. That is what their MI insurance does. It protects their assets. Investors crammed getting MI as soon as the market turned and they could see the foreclosure wave coming. The homeowner has the mortgage and a promissory note. The investors hold the note and therefore do not have to tell the borrower they are placing their own MI on the note. 

This comment is not to be construed as a defense of lenders or their irresponsible behaviors in bundling bad notes. :) 

Jan 11, 2012 03:14 AM
Chris Ann Cleland
Long and Foster Real Estate - Gainesville, VA
Associate Broker, Bristow, VA

I had one of these silent mortgage insurance companies klll a deal that was what I considered a slam dunk.  It was infuriariting.

Jan 12, 2012 04:59 AM