Mortgage Insurance and Short Sales. Is It Cheaper to Foreclose?

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

Short Sale negotiatorPossibly. I had a member of Short Sale Superstars wonder why a Mortgage Insurance Company would let a property go to foreclosure instead of agreeing to a Short Sale now. The property is in a non-recourse State so the Seller is protected from any deficiency judgments after a foreclosure. So why wouldn't the MI just settle now and be done with it?

First, let's define what Mortgage Insurance is. There are 2 kinds of Private Mortgage Insurance (MI).

  • BPMI. Borrower Paid Private Mortgage Insurance 
  • LPMI. Lender Paid Private Mortgage Insurance

MI coverage can be for 20% or more of the initial loan amount. MI offsets the loss incurred by the Lender/Investor when a mortgage loan defaults.

For example: Mr Smith (Borrower) purchased a property for $200,000 in 2004 and put 20% down. His mortgage was for $160,000. Federal Trust Bank (Investor)  bought the loan from Wells Fargo (Lender/Servicer) and decided to protect their investment by purchasing MI for 32% of the loan amount. So Wells Fargo buys an insurance policy (LPMI) from Genworth Mortgage Insurance Company. As part of this insurance agreement Wells Fargo gives Genworth the authority (delegates) to decide whether a defaulted loan is foreclosed on or a Short Sale is accepted.

In 2010 Mr Smith goes into loan default and attempts to do a Short Sale. Even though the Investor, Federal Trust Bank, now owns the loan, Mr Smith still makes payments to his "Lender" Wells Fargo. His REALTOR(R) finds a buyer and submits the Short Sale request to Wells Fargo. Wells Fargo submits the request to Federal Trust Bank. Federal Trust Bank has to submit the Short Sale to the MI Company, Genworth, who has the final authority. 

Remember the Mortgage Insurance Company is paying out on the amount of the loan NOT the value of the property.

Let's assume that Mr Smith's property is now worth 50% of what he paid in 2004. Just for reference, in my market of Poinciana Florida, the value would have declined about 80% during this period. 50% is being conservative in the hardest hit areas. Anyway......

The initial loan was for $160,000. 32% is guaranteed by Genworth. That's $51,200. The insurance payout is $51,200 whether foreclosure, Short Sale or Deed in Lieu.

The Short Sale request is for $90,000. This amount is the purchase price of $100,000 (Fair Market Value) minus 10% in selling costs.

In this scenario the Investor will get $90,000 + $51,200 = $141,200.  Plus any incentives like HAFA.  ***By the way, interest on a 30 year loan at 6.5% for the first 5 years is over $60,000!!! So the Investor will actually MAKE money on this Short Sale.

The Lender/Servicer, Wells Fargo, also made money. They made money when they initiated the loan. When they sold the loan. And when they serviced the loan.

The loser is the Mortgage Insurance Company. They are being asked to pay out $51,200. To offset this they may very well ask Mr Smith to make a cash contribution and/or sign a promissory note. If he refuses then MI may choose to offset their loss by allowing the property to go to foreclosure. MI can then pay out the same $51,200 in the future using future money. This is the time value of money. 

In this Short Sale example the only entitty that lost money is the MI Company!!! 

The lesson here is: When the MI Company requests a cash contribution and/or a promissory note the Borrower will more than likely have to pay something or the Short Sale will be denied. Get it?


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

The BIO for Bryant Tutas


 Tutas Towne Realty, Inc handles Florida real estate sales, Florida short sales, Florida strategic short sales, Florida pre-foreclosure sales, Florida foreclosures in Kissimmee Florida Short Sales, Davenport Florida Short Sales, Haines City Florida Short Sales, Poinciana Florida Short Sales, Solivita Florida Short Sales,  Orlando Florida Short Sales, Celebration Florida Short Sales, Windermere Florida Short Sales. Serving all of Polk, Osceola and Orange Counties Florida. Florida Short Sale Broker. Short Sale Florida.

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Melissa Zavala
Broadpoint Properties - Escondido, CA
Broker, Escondido Real Estate, San Diego County

This is a nice explanation. I've recently written a few posts on the same topic. Seems like people are asking about it more and more.

Apr 25, 2011 02:22 AM #1
Mike Cathell
Real Estate Services of SWFL, LLC - Fort Myers, FL
Real Estate Investing for Real People


great information.  As homeowners become more educated in this very complicated procedure, they ask more and more questions about the Bank's choices.  Your info is timely and very helpful to agents sellers and buyers alike.

Apr 25, 2011 02:35 AM #2
Kim Boekholder Utah Real Estate
Results Real Estate 801.580.5624 - Draper, UT
Broker, Results Real Estate

exact scenario I just went thru, as I'm sure many other agents across the U.S.  This is a very nice breakdown to help everyone understand exactly how the calculations are figured out when your "sellers" are asked for a "promissory notes." 

Apr 25, 2011 02:52 AM #3
Wendy Rulnick
Rulnick Realty, Inc. - Destin, FL
"It's Wendy... It's Sold!"

Bravo, bravo, clap, clap!! This post is a course module :) Bryant!

Apr 25, 2011 12:12 PM #4
Laurie Mindnich
Centennial, CO

BB, this is really important for everyone to understand. Thank you.

Apr 25, 2011 01:24 PM #5
Bob Jakowinicz
National Realty Centers Livonia--Bob Jakowinicz - Livonia, MI
Michigan Real Estate Agent-- MI RE Adventures

Nice information in a quick post!  So many ask me "who is this investor"?

Apr 26, 2011 03:16 AM #6
Tni LeBlanc, Realtor®, J.D.
Mint Properties, Lic. #01871795 - Santa Maria, CA
Tenacious Tni (805) 878-9879

I get it but I don't think the MI company really improves their situation THAT much with the future value of money.  

Of course, you are 100% correct this is exactly how any insurance company will look at things -- they "win" by paying out slowly... very slowly.  I'd hate to pay out even more money (as a tax payer) to try to change this perverse incentive but it does make files with MI difficult to close.

I wish there was something to be done.

Excellent blog, Bryant, as usual.

Apr 26, 2011 06:22 PM #7
Gary L. Waters, Broker Owner, Waters Realty of Brevard, LLC
Waters Realty of Brevard, LLC - Rockledge, FL
... a small office, delivering big service!

BB - Good information. I try to follwo the money trail but it can get so confusing. Thanks, asusual!

Apr 27, 2011 01:09 PM #8
Rita Fong
RE/MAX REAL ESTATE TODAY, Executive Broker 901-488-9590 - Marion, AR
Realtor - Marion Arkansas Homes for Sale

Bryant, this definitely helps to understand the process more.  Thanks!  

Apr 30, 2011 07:27 AM #9
John Lott

In Sept 2010 I made a $105,000 offer on a house listed for short sale for $90,000. The reason was we wanted to insure we could but the house and closed before Dec 31 2011.

On May 1, 2011 we are still waiting for M.I. to approve the sale.  I could not believe it when Bank of America verbaly approved our offer andthen sold the mortgage in Dec 2011 to GreenTree while we were waiting for thier letter of approval. This started the process over again and I believed Greentree should be able to demand the M.I. Company approve the sale when I said I was going to rescind my offer of $105000 and make a offer of $90,000.

This article explains how M.I. is a home buyers nightmare as there isn't a way to pressure them by threaten to rescind a offer it. It is exactly what they want the buyer to do so the property will go into foreclosure giving them more time to earn money.

Thanks for the information! I forwarded your article to Senator Bill Nelson hoping he can find a solution!

John Lott

Apr 30, 2011 05:15 PM #10
Nathan Tutas
Tutas Towne Realty, Inc. - Davenport, FL
Your Central Florida Real Estate Expert

Wendy is right; this is a class waiting to happen. Really good breakdown of subject material I wasn't very well aquainted with. And the lessons keep coming...

May 04, 2011 03:57 PM #11
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