My disclaimer: I'm not an attorney or a CPA. I just do a lot of short sales and therefore have formed an opinion. And you know what they say about opinions!
Private mortgage insurance (PMI for short) can be a really big road block in short sales. Sometimes it's not even obvious that there is pmi on a loan until they step in at the last moment. The problem is that the banks want the pmi coverage, but pmi doesn't have to cover losses until the home is foreclosed on. This causes the banks to ask the pmi company to allow that coverage "early" (before the home is foreclosed on). Since pmi doesn't have to do this, they usually want an incentive. This incentive is typically in the form of a promissory note or cash contribution from the seller. Since we all know that sellers in short sales don't have any money, and in some cases wouldn't owe anything if they let the home go to foreclosure, they sometimes can't or won't sign a promissory note or bring cash to closing.
This whole scenario can sometimes cause a perfectly good short sale to end up in foreclosure. Who wins in this case? The bank doesn't win because they generally get 20% less in a foreclosure than a short sale. The buyer doesn't end up with the house they fell in love with. The seller ends up with a foreclosure on their record. Home prices in the area are affected by the foreclosure. The economy suffers. The only one who doesn't have any skin in the game is the pmi company. Depending on the scenario, they end up paying out the same amount either way. Their greed in wanting to get something extra out of someone who is already in distress is causing everybody else to lose. Check out one such case in an article on NPR.
If you or somebody you know is in distress, please call us. 503-270-5587
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