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I'm hoping a lender or fund manager out there can shine a little light on this for me...
In the middle of all the failed loans and compromised lender situations we're in, I can't keep these questions out of my head and I don't know why I'm not hearing anyone else talking about/addressing the issue.
If borrowers who had less than 20% equity in their properties at the time of funding - were required to purchase/carry PMI (Mortgage Insurance) to cover the higher risks associated with their potential default - then why are the investors who bought these (now failing) bundled notes getting hung out to dry when the borrowers fail to repay? (ie: Bear Stearns/ Goldman/ Lehman/ MoganStanley)
Where did the insurance money go? Who got it, what is it paying off? Why are these loans that are going into default not stabilized by the PMI? These PMI payments were substantial amounts compared to the amount they were insuring against and even if just a small portion was paid by the borrowers before defaulting, it's an insurance pool - not all borrowers paying the fees are defaulting.
I understand that the note values at the time of default may still be more than the value of the property secured - but the PMI was tied to the value of the note and the value of the note was what was sold to the investors. So why isn't PMI the silver bullet it should have been?
A home back on the market because it's been abandoned by it's prior owner is still going to inflate inventory and drive the prices of competing property down but PMI should have protected the cash on Wall Street and it doesn't seem to have done that successfully.
I found this web site which describes far greater benefit to borrowers than I understood PMI to cover:
And it lists in the "about MICA" section a group of underwriters that cover PMI - frankly the list explains why some of these companies stock values are down so sharply. But I can't help wondering if the whole PMI "promise" was a fraud that all property owners are paying dearly for.
I am dying to get an answer to this- Where did the PMI go? - if anyone can chime in with an answer or primary resource on the subject that I can research - I would greatly appreciate it.
I'm not an expert and maybe my answer isn't the right one but could it have to do that many people got a second mortage (so in total had a 100% mortgage and not one penny down), for the 20% and the fist mortgage defaults first so the 20% for the insurance comes in too late....just a suggestion.
Maybe you should put this thread up on the mortgage forum because there are experts who probable know the answer to this issue.
Very interesting by the way.
My guess is going to be that the bailout is the scam not the PMI! But I'm anxious to hear the answer, too.
I'm not happy about bailing out the country because of people like all my former coworker idiots who we told time and time again to stop their foolishness and they refused to listen.
By the way, isn't PMI discretionary? So you're assuming that there WAS PMI. but because the lenders where so money hungry to sucker in all these unsophisticated sub primers I wouldn't be a bit surprised if PMI was waived. AND sometimes PMI is canceled after a year or two of payments, right?
Probably because the properties had the fake inflated appraisals, the lenders were perfectly happy to drop PMI before the loans even adjusted. They act like they were believing their own B.S. anyway............
Private mortgage insurance has been around since the 50's. It has worked ( meaning that the insurer had adequate funding to pay claims) reasonably well over the years, because of geographical diversifcation.
PMI was an obstacle for many buyers because they could not afford PITI and PMI. And it did not help that PMI payments were not deductable.
And so lenders used the concept of piggyback loans ( second mortgages) as an alternative to PMI, to qualify more buyers. Interest on such loans was deductable. On an after tax basis, it was often less costly for a homeowner to carry a piggy back than PMI.
In late 2006, Congress made PMI a deductable expense. The timing of this is more than a passing curiosity.
I think it reasonable to assume that private mortgage insurers no longer have the financial resources necessary to do what they were intended to do, insure the lender in the event of a foreclosure for the difference between the equity in a home and the net proceeds, after sale.
The inability for private mortgage insurance to do what it was supposed to do, is no doubt challenging FNMA and FHLMC to make good on payment of P/I to holders when the homeowner/lender/insurer cannot. It's a Magilla.
This mess is well beyond subprime loans. It's all about the ARMs of the past 5 years. When owners come to terms that they may owe more than their house is worth, that they may have lost their real and paper equity, that they have to write a check to close, some of them, too many of them, are walking away from their obligations.
Affordable housing has been an objective of this country for 75 years. HUD, FHA, VA, FNMA, FHLMC, GNMA, subprime, low doc, no doc, ARMs, PMI, second mortgages and and so on have been around for decades and for the most part, worked as expected. All of these individual elements combined into the perfect storm when the pre- 9/11 housing momentum met rapid fire rate declines, following 9/11.
Life in the USA has been and is one giant bail out. Imagine living in a place where there are no mortgages, interest deductions, tax deductions or the endless opportunities that exist here, today. Imagine the future. It's all about the balance.
Last edited by middle-aged mom; 07-15-2008 at 12:48 PM..
As a prime buyer, I've never paid PMI (except on my first house which was FHA). That is with 5 or 10% down. We do piggy-back loans - 80% first mortgage, 10 or 15% second mortgage. Voila, no PMI! I'm guessing these sub-prime loans didn't have PMI either.
PMI Group, MGIC Investment and Radian Group were the most significant insurers. AIG did, but not to the extent that the others did.
I have read various articles that attribute a range of 22-60 % of all loans written in 2004-6 avoided PMI by creating a second mortgage for the shortfall in downpayment. Speculation on my part here when I say that perhaps the spread between 22-60% might include all second mortgages, including home equity loans)
My area has not had a significant number of foreclosures. Of those we have had , every single one of them was financed as a piggy-back, meaning the so called owners never had any skin in the game.
That so many believed that home values were going to sustain the level of appreciation they had for a relative blip in history, is mania.
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