Mortgage Insurance… Should I Care?

Reblogger Bryant Tutas
Real Estate Broker/Owner with Tutas Towne Realty, Inc and Garden Views Realty, LLC BK607690

http://centralfloridashortsales.com

Hi folks. Below is a really good article explaining Mortgage Insurance (MI) and how it relates to Short Sales. More times than not when you as a seller are being asked to sign a promissory note and/or make a cash contribution this request is coming from the MI Company.

They are insurance companies and are in the business of determining risk. If they see that you have the ability to pay then it is their responsibility to ask you to contribute.

Don't let the requirement to sign a small promissory note derail your Short Sale attempt. Usually these notes are less than 10% of what you owe AND they have ZERO interest and can be paid over 5-15 years. As a borrower you have already signed a promissory note. You signed one when you took out the mortgage for the amount of the loan.

If the MI Company is willing to approve the Short Sale and forget about the original note for pennies on the dollar you need to really think hard about agreeing. OR... you may end up being foreclosed on and having a cash judgment placed on you where they can garnish wages, seize assets and basically make your life miserable.

Are you facing foreclosure in Florida?

Do NOT be foreclosed on! Avoid foreclosure. Short Sales DO close.

Want to find out more? www.CentralFloridaShortSales.com

***I am NOT an Attorney nor do I play one on TV. Click the button below for my Bio.

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Original content by Amy Ransdell

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!

      


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Topic:
Home Selling
Location:
Florida Polk County Lakeland Hunters Greene
Groups:
Real Estate Rookie
Tags:
mortgage insurance
promissory note
short sale

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Ambassador
1,367,268
Loreena and Michael Yeo
3:16 team REALTY ~ Locally-owned Prosper TX Real Estate Co. - Prosper, TX
Real Estate Agents

A good re-blog and I'm glad you did. Here's what I dont understand about MI.

They are going to consider if a mortgagor should participate in their loss (the claim).

Why or how can that be? The borrowers pay monthly on MI but by the time the insurance need to kick in, MI would consider?

Whatever happens on the backend? Does MI reimburse the lender for the deficit up to the insured amount? Where could I find good information about this?

Why does it (or at least to me) not seem like a "traditional" insurance?

Dec 21, 2010 02:08 AM #1
Rainmaker
1,022,871
Rob Arnold
Sand Dollar Realty Group, Inc. - Altamonte Springs, FL
Metro Orlando Full Service - Investor Friendly & F

An MI company getting a homeowner to pay a promissory note as a result of a short sale is kind of like Geico asking a driver to sign a promissory note to reimburse them after a car wreck.  Even after the driver paid premiums and a deductible.  That's my take on it.  But at the end of the day, it probably is better for the homeowner to simply sign the note and move on.

Dec 21, 2010 02:13 AM #2
Rainmaker
1,051,946
Steve Loynd
Alpine Lakes Real Estate Inc., - Lincoln, NH
800-926-5653, White Mountains NH

A new twist to the short sale issues, two steps forward and one step back - I often tell sellers considering a short sale if it was easy everyone could get the deals done efficiently.

Dec 21, 2010 03:42 AM #3
Rainmaker
1,003,259
Kevin J. May
Florida Supreme Realty - Hobe Sound, FL
Serving the Treasure & Paradise Coasts of Florida

BB - Between Amy and "Z's" efforts plus yours we'll get through these Short Sales yet.  Great information, I don't know how I missed Richard's original post about this here but thanks for the link.

Dec 21, 2010 04:34 AM #4
Rainmaker
525,554
Dave Halpern
Keller Williams Realty Louisville East (502) 664-7827 - Louisville, KY
Louisville Short Sale Expert

Bryant,

Excellent point about sellers signing a note for a small fraction of the amount owed, at 0%. MI companies are becoming more demanding. Sometimes the seller will file BK and wipe them out and sometimes they'll be more pragmatic and sign the note.

Dec 21, 2010 02:18 PM #5
Rainmaker
4,797,311
Gabe Sanders
Real Estate of Florida specializing in Martin County Residential Homes, Condos and Land Sales - Stuart, FL
Stuart Florida Real Estate

Thanks Bryant, I mossed this the first time around.  It's a great post!

Dec 22, 2010 12:40 AM #6
Rainmaker
1,142,060
Bryant Tutas
Tutas Towne Realty, Inc and Garden Views Realty, LLC - Winter Garden, FL
Selling Florida one home at a time

Loreena. Not all MI is paid for by the borrower. Lenders also buy MI. But in either case the lender/investor is the beneficiary NOT the borrower. This is why they can require the borrower to participate in the loss. Depending on how the insurance is structured MI will pay a certain percentage of the loss to the lender.

The benefit to the borrower is that by purchasing MI (for the lender) they are able to reduce their down payment because they are reducing the risk to the lender by insuring some of the loss if the loan goes onto default. MI usually pays if the loan is foreclosed on, forfeited (Deed in lieu) or paid "Short".

Dec 22, 2010 12:52 AM #7
Rainmaker
228,991
Coldwell Banker Camelot Realty
Coldwell Banker Camelot Realty - Mount Dora, FL
Homes for Sale Mount Dora Realtor

BB,

It's amazing that the M/I companies are willing to settle for pennies on the dollar.

 

Do you think this will change in the future.

 

Happy Holidays

Dec 22, 2010 02:10 AM #8
Ambassador
1,229,656
Melissa Zavala
Broadpoint Properties - Escondido, CA
Broker, Escondido Real Estate, San Diego County

This is a good reblog, albeit a little bit long. I like the way she calls MI a monkey wrench. That's exactly what it can be.

Dec 24, 2010 09:00 AM #9
Anonymous
Susan

This was great information.  Thanks so much!  We've been waiting for the bank to accept our offer on a house in FL.  Months later, the seller and the bank/lender accepted our offer.  Great!  Now, I am being told that the MI company wants ME to pay $12k more to make up their loss.  Are you kidding me?!!  So, I said no.  Now today, they are asking me to pay $6k and that the seller came up with the other half.  Again, are you kidding me?  Is this legal?  I'm ready to throw in the towel.  What's up with these MI companies and can they ask the new BUYER to make up the difference?  Isn't that why it's called INSURANCE?  Any advise would be great!

Thanks!

Jun 09, 2011 11:28 AM #10
Rainmaker
1,142,060
Bryant Tutas
Tutas Towne Realty, Inc and Garden Views Realty, LLC - Winter Garden, FL
Selling Florida one home at a time

Susan. My opinion is that they are not asking you. They are asking the seller and the seller is asking you. Whether or not you pay should be based on how badly you want the property and is it still an OK deal if you do so. MI companies are well within their right to ask the seller for a contribution. It's legal.

I hope this helps.

Jun 09, 2011 11:38 PM #11
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