MORTGAGE INSURANCE SUBROGATION AND WHY IT DRIVES THE SHORT SALE DEAL

By
Real Estate Attorney with THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY

Mortgage Insurance has become a problem when negotiating a short sale. What seems like a straight forward negotiation becomes one of hard fought demands to reach a viable solution. The reason is the existence of mortgage insurance on the mortgage loan. Now many borrowers hear that the lender's mortgage insurance company is making demands upon the borrower in a short sale and wonder why there is mortgage insurance? Lenders always required mortgage insurance if the loan being made was greater than 80% of the value of the home when the loan was made. It was typically called PMI.

However, lenders were able to purchase a product of mortgage insurance developed to cover loans already made and it protected the mortgage from a short fall in value of the underlying collateral. This is basically your lender betting that the value of the loan was going to fall based on the collateral backing it also falling and the borrower then defaulting on the loan. Sounds like someone got smart out there! And they did. It is just that somehow there were insurance companies willing to take that bet - many of which are the recipients of government bail out funds (think AIG - one of the biggest that took the bet that subprime would not default).

The legal methodology is actually simple and it is called subrogation.

Subrogation is receiving the benefit of another’s position because of providing some consideration to that person.

For example (and the most common) is the payment of a claim you make on your car insurance because someone backed into your car door. Your insurance company has you with a $500 deductible and the property damage is $750 (to fix the car).

You make a claim and your insurance company pays you $250. But the language in your policy says that by you receiving that money you also assign to the insurance company your property damage claim against the driver that hit you.

Your insurance company is then entitled to sue the driver (and his insurance company) as assignee of your claim for the whole $750. This is called the subrogation claim. When they collect, they keep the $250 they advanced and pay you the $500 deductible.

Same with MI insurance – known or unknown. The insurance company pays the claim and gets the subrogation rights – essentially an assignment of the promissory note to the extent there is any money still due on it. And any money the insurance paid out to cover the bet is NOT deducted from the promissory note.

Like the car insurance, the driver that hit you owes not just the deductible or the payment you received, but for the entire damage. Your deal with your insurance company has nothing to do with the obligations of the driver that hit you.

In the mortgage insurance the same issue arises. The unpaid note (all of it less the amount received from the short sale) is still your obligation and that gets passed to the insurance company to deal with as it pleases.

The end result is the mortgage insurance company can make or break the deal.  They are coming out of pocket to pay the claim at the time of the short sale closing and that is "new money" - not something long ago paid and lost, but a current expenditure of cash.  The result is that the fewer claims paid the more the profit to the insurance company. The more claims paid, the more aggressive the insurance company becomes to collect the deficiency - and that deficiency is NOT reduced by the payment the insurance company paid to the lender essentially on YOUR behalf as the borrower.

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Copyright 2011 Richard P. Zaretsky, Esq.
Be sure to contact your own attorney for your state laws, and always consult your own attorney on any legal decision you need to make. This article is for information purposes and is not specific advice to any one reader.
Richard Zaretsky, Esq., RICHARD P. ZARETSKY P.A. ATTORNEYS AT LAW, 1655 PALM BEACH LAKES BLVD, SUITE 900, WEST PALM BEACH, FLORIDA 33401, PHONE 561 689 6660  RPZ99@Florida-Counsel.com - FLORIDA BAR BOARD CERTIFIED IN REAL ESTATE LAW - We assist Brokers and Sellers with Short Sales and Modifications and Consult with Brokers and Sellers Nationwide! Shortsales@Florida-Counsel.com  Website www.Florida-Counsel.com.

 


See our easy to understand articles at:
TABLE OF CONTENTS - SHORT SALE AND LOAN MODIFICATION ARTICLES

 

Comments (7)

Gary L. Waters Broker Associate, Bucci Realty
Bucci Realty, Inc. - Melbourne, FL
Fifteen Years Experience in Brevard County

Sounds like the short sale is not the ultimate solution to a hardship situation - just a temporary delay.

Nov 01, 2011 01:25 AM
Gabe Sanders
Real Estate of Florida specializing in Martin County Residential Homes, Condos and Land Sales - Stuart, FL
Stuart Florida Real Estate

Thanks for the info Richard.  How does the MI company deal with this subrogated loan when the short sale fails and the property goes into foreclosure?

Nov 01, 2011 01:36 AM
Richard Zaretsky
THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL
Florida Real Estate Attorney

Gabe -

The MI issue remains whether foreclosure sale or short sale or even Deed in Lieu.

In a foreclosue situation, the MI pays the policy coverage relative to what the lender got as a result of the foreclosure sale.  If a third party purchased, then the lender got cash.  If no one outbid the lender, then it got the property.  Cash is measured by cash.  If the property is received, the lender got something of a cash equivalent and the MI policy will have methods of monetizing that cash equivalent to give it a number.

Remember, the MI insuarnce policy may not cover 100% of the loss - just the policy amount.

Nov 01, 2011 01:41 AM
Gabe Sanders
Real Estate of Florida specializing in Martin County Residential Homes, Condos and Land Sales - Stuart, FL
Stuart Florida Real Estate

Thanks Richard.  Just trying to understand which would be more beneficial for the MI company and subsequently try to understand how to make these deals work. 

Nov 01, 2011 02:10 AM
Richard Zaretsky
THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL
Florida Real Estate Attorney

for the MI company, I would think it is the highest sum the short sale can bring - thereby lessening their exposure on the amount of their policy coverage.

Nov 01, 2011 02:28 AM
Kimberley Kelly, SFR, HAFA, GREEN
HK Lane, Christie's International Affiliate, 760-285-3578 - La Quinta, CA
I do Real Estate like I played polo-to WIN!

I do alot of Short Sales here in Palm Springs, California.  Many of them have MI..it is ALWAYS a problem to get them approved.  However, I have not lost ONE due to the MI company.  I find out at Listing if there is MI, then I know how to proceed.  They'll negotiate too and release the deficiency IF it is upfront and negotiated out.  They would rather collect SOMETHING right now than wait years for the foreclosure to go through.  We are a non-deficiency state, so they cannot pursue after Foreclosure anyway.  They are always tough and not reasonable, but they DO release their liens.

Nov 01, 2011 02:30 AM
Michael Collins
*ROCK REALTY|Broker|Realtor|Real Estate|WI Short Sale Agent* - Janesville, WI
CDPE, SFR , Wisconsin Short Sale Specialist Realto

Great article Richard and a good example given with auto insurance.

Nov 01, 2011 04:16 AM

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