Mortgage Insurance… Should I Short Sale Care?

Oft-times mortgage insurance can become the monkey wrench in the short sale approval process.  If you haven’t encountered mortgage insurance (MI), you will.  So, what should you expect and what should you do?  Better yet, what do you do to get to the closing table?

Well, I first want to clear up with mortgage insurance is for those of us that that like to say we know but could truthfully use extra light on the subject.  Mortgage Insurance is exactly that.  It is insurance.  Lenders or the investors backing the loan take out mortgage insurance which compensates them if the borrower defaults on the mortgage loan.

General rule of thumb, although variances exist, are that lenders will require mortgage insurance for mortgage loans that exceed 80% of the property’s sale price. Now, MI can actually be present anywhere between 0%-100% based upon what the lender orders.  The insurance covers a percentage of the entire loss, not just the amount above 80% or the amount after short sale or the original loan amount.  Pool coverage will cover 100%.  MI can be purchased by lenders on first mortgage loans as well as helocs and 2nd mortgages.  MI will generally show up in the borrower’s payment, but does not have to.

Private mortgage insurance, paid for by the borrower, allows a borrower to obtain a mortgage without having to provide 20% down payments by covering the lender for the added risk of a high LTV mortgage.  PMI is paid for by the borrower.  Once the mortgage balance owed drops below 78% of the home’s purchase price, the law requires that the PMI is canceled.  PMI can also be canceled if the property appraisers such that the loan balance is less than 80% of the home’s value.  Even after PMI is cancelled, the lender could still have lender paid MI on the loan that the borrower may be unaware of.

What happens when a property with MI goes to foreclosure?  The MI company will reimburse the lender for the insured loss.  Same thing happens with a short sale.  So, loans with MI are not always the fastest to be approved for short sale.  Firstly, the foreclosing lender has slightly less incentive to approve a short sale at certain percentage points.  If the lender moves forward without the MI, they would be sacrificing their MI participation and the potential claim. It is very rare for a lender to concede a claim.  Secondly, the MI companies are not going to pony-up the dough until they have also done their due diligence regarding the borrower’s ability to pay.  So, the approval has to wait through several different reviews and each review includes an unavoidable time-line.

Taking this a short sale step further….

When asking for a short sale, the MI company is going to review the mortgagor’s ability to pay with a fine tooth comb.  They are going to consider if a mortgagor should participate in their loss (the claim).  After all, no different than any other lien holder, they need to squeeze as much out of the responsible party as possible.   You should also expect the MI company to review the property’s value no different than the lien holders.

The MI company will consider if the seller has cash in reserve accounts, purchased the property for investment purchases, is paying all of their bills except for the insured mortgage, will have available cash-flow to cover a deficiency or promissory note payment if relieved of their mortgage debt, or if their hardship is not justifiable.

Borrowers who have the ability to pay will be asked to pay.  For a MI company to agree to the short sale, they are doing the mortgagor (seller) a favor.  They are allowing the short sale to proceed so that the seller does not have a foreclosure on their record.  In return for the favor, don’t be surprised if the MI company requests the lender or servicer to include cash at closing or promissory note requirements as a part of the short sale approval requirements.  The mortgagor could be asked to pay the coverage percentage of the payoff, not the original loan balance or the plausible deficiency balance.

When figuring what could be asked of a seller or a party to the transaction to effectively market, try to find out the coverage amount.  Remember that the MI company does not have to tell you the amount of the potential claim or the percentage coverage.  You can ask the servicer or have the homeowner request this information if the MI company does not willfully share.

When profiling a short sale deal, ask the lender if MI exists and who the coverage is through. You can submit authorization to the MI company and start a dialog with them regarding their policy, review process, current review time-lines, and loss policy.   I do not recommend that you submit the short sale package directly to the MI company until you have been through the initial review process with the primary lien holder and only if you have received resistance based upon an MI objection.

As an in-the-pocket suggestion, don’t bluff allowing a property to go to foreclosure to force the MI company’s hand.  Remember how the claim’s process works.   MI companies generally want to cooperate, but have investors to protect no different than all other lien holders.

Sometimes MI companies can be your short sale advocate.  To reference a recent case study:  We had a property facing a strict foreclosure.  The lender refused to speed-up their review process so that the seller could avoid foreclosure.  Without much time to spare,  we went around the lender and directly to the MI company with our short sale package.  The MI rep reviewed the thorough package and realized that the loss by short sale would be much less than the loss by foreclosure.  They issued an expedited review and forced the lender’s participation.

Clearing mortgage insurance cobb-webs …..have questions, case-studies, or tips to share on MI – Please comment below!