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.
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.
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