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I've also posted this one of the real estate sites. They recommended I post this question on the finacial site since we've gotten no answers there yet. I'm a broker in Florida and own a title company so we've seen a fair number of sales/borrowers/loans close over the years.
I'm hoping a lender or fund manager out there can shine a little light on this...
In the middle of all the failed loans and compromised lender situations we're in, I don't know why I'm not hearing anyone else in the media talking about/addressing this issue.... What happened to PMI???
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)
- I know some lenders wrote splilt notes (one at 80% and one at 20% to get to 100% and ducked the PMI) those did occur but they were the exception. We saw many many loans close with PMI charged to borrowers.
So... where did the insurance money go? Who got it? What is it paying off? What percent of these high LTV loans that are going into default were 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?
If it's not sufficient to cover the loss to the investor, why is it still being marketed (assuming any borrower today can even find a higher ltv than 80/20 - except FHA - a whole other issue.)
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 benefits to borrowers than I understood PMI to cover: Buying a Home [PrivateMI.com]
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.
Most of the companies you mentioned are investment banks on Wall Street. They did not work with "prime" loans sold to Fannie/Freddie which typically cary PMI. They worked the Alt-A or "sub-prime" market. These loans had either no PMI in exchange for a higher interest rate or were 80/20, 90/10 or 75/25 split loans as you say.
The majority of the companies that have gone out of business were these A- and BC lenders that took on higher risk in exchange for higher fees and rates. Most sold loans under speciality lending divisions or took loans from other lenders, bundled them into securities and sold them on Wall Street to investors.
Loans with PMI were done by more "traditional" banks like Wachovia, Wells Fargo, Bank of America, etc and by brokers that worked with Fannie Mae/Freddie Mac programs. The main problems so far with Wachovia, WAMU and others has been their exposure to Option ARMs and other Alt-A or subprime products. During the boom they all quickly expanded or bought companies in this field to fuel their growth, now those decisions have come back to hurt them.
That is not to say that "prime" loans have not proven to be a big risk. The PMI companies and Fannie/Freddie have also been undergoing their share of problems. To compete with "sub-prime" and A- loans, they relaxed guidelines and started accepting lower and lower credit scores, higher debt-to-income ratios and relaxing the documentation requirements on income/assets. They also lowered the cost of PMI to compete. Together this added more risk and lowered the rewards associated with the loans.
Banks can and do regain some of their losses on PMI loans (forcing PMI companies to close or cut back as well) but with the extent of the losses it is not enough. If the PMI losses were the only factor, the losses would be manageable. But its just one small part of the huge losses.
To clarify my initial point, it is those investors on wall street that are "holding the bag" on these failing notes - which I had experienced as insured. Clearly I was wrong on that point. That explains a lot, I guess I'm surprised to find that they bought uninsured notes - the rates must have been very seductive.
When we work out a short sale on a property now - we aren't just dealing with the lender who wrote the original note (Like WAMU or Wells or Deutche Bk) we are working with both the lender and the buyer/investor of the note (like a Morgan/Stanley or a Goldman) who are clearly being affected by these defaults.
So the investment bankers bought uninsured notes? Knowingly?
But what about the failure of Fannie and Freddie? If they had PMI on their notes, why are they now suffering? Because it was insufficient to cover the losses? Why? Because of the volume of defaults?
I understand lenders want to write loans. I understand circumstances change and people can't pay loans back. I understand that people who would like to pay loans back but can't because they can't liquidate the asset at a previously established value that is no longer in place due to a market that's not what they anticipated. But I do not understand how PMI pricing was set, where the marks for payout were anticipated, what the ratios for claims were estimated to be in various scenarios. I do not understand this issue and no one is discussing it.
Surely the investment banks did not anticipate that the volume of loans that failed would fail. Surely there must have been some gross miscalculation in the estimates of the risk taken on... or, there was the reliance on other forms of security (such as over valued collateral - very likely) and PMI.
Do you know of an entity that measures PMI? Which lenders did write it, which didn't? What percentage of loans had PMI? Is there an entity reporting on this subject?
I know in almost all the cases of split loans that we saw go through our title company (those that had two separate loans - one for 80% and one for 20% creating 100% financing) - that the SAME lender extended BOTH loans... so what's that say for reducing their risk on the collateral?
Great question, sezme, a former mortgage broker....
I did notice that the PMI companies stocks have lost a lot of value in the last couple of years....they are probably taking big hits insuring many of those bad loans.
ntfeldman - Yes, the investment banks bought uninsured notes. After all, how many investments (stocks, bonds, notes) ever have any sort of insurance on them? As long as the risks are priced in correctly, you expect a certain level of default and still to make a profit. One of the main problems is that risk was NOT priced in anywhere close to what it should have been. Investment banks were also reselling these securities so they were focusing on the short term profits from packaging/sale, not the long term potential losses from their risks.
People complain about 8% interest rates on 100% stated income ARMs.... if you look at the history of the mortgage industry, 8% rates are abnormally low. When I bought in 2000, with an FHA loan... 750 credit, 5% down with a stable job history and 6 months of emergency reserves my rate was 8.5%. Move forward to 2005, and some borrowers were paying that with 0 money down, no rent history, 650 score and no proof of income or assets. Not only did the guidelines get crazy, but for all purposes the money was free. If we went back to ARMs in the double digits with 20% down and strict underwriting like it was in the 80s, what would the American's of today do?
Fannie and Freddie are suffering because of both the volume of loans in default and the amount of those defaults. Housing was artificially inflated by home buyers thinking (much like some banks) that home prices would only go up. People bought way more than they could afford under the theory that in 2-3 years they could sell or refinance their way into huge profits.
PMI companies did the same. They competed with one another for market share, like banks. So each tried to lower guidelines and reduce pricing to win the sale. After all "when banks compete, you win" became the motto of the boom. Everyone went from selling advice, value and sustainable products to selling price and access. 100% for all, no questions asked... and .25% lower than the next guy. So the industry became about price and everyone who had a silver tongue jumped on board to sell the story of the housing millions to be made.
Meanwhile, no owners stopped to think what would happen when the music stopped and you had a $750,000 home that you could not afford and could not resell. No banks stopped to think what would happen if all these loans written at low rates with high risk- with little to back it except the assumption that prices would go up forever- could not be passed on to someone else. Sooner or later the bill becomes due. Much like the US is mortgaging our grandchildren to pay for our current excess, the housing market did the same thing.
Its not that banks are stupid, but come on... the entire country is doing the same thing with our budget. We just have faith that if we buy today, we will find a way to pay for it tomorrow.
Not sure about % of loans with PMI and those without. The sub-prime market used to be small up until a few years ago. Really the % of homes in foreclosure is not that large. It is a huge impact and in some areas (CA, FL especially) it might be 5-10 years before the market fully recovers. When it does, I am sure this will all be forgotten and people will be more than ready to make the same mistakes again.
I have ask this question of several people and all of my state reps as well as congress I have not recvd one answer yet. let me know if you find out the real truth behind this scam. I also sent foxnews the question and have nto heard back from them yet either,
Well.... AIG was the largest PMI insurer so that says a little
Quote:
Originally Posted by kneesee1222
I have ask this question of several people and all of my state reps as well as congress I have not recvd one answer yet. let me know if you find out the real truth behind this scam. I also sent foxnews the question and have nto heard back from them yet either,
kneesee1222
These have been interesting times. AIG was the largest of PMI insurers and I suppose the weight of this has taken this among many tolls on them recently. The rest as they say is history.
What I found interesting was the quote of the number of distressed (foreclosures) pending in the US was in excess of 5 million. Do you all know how many homes are closed each year in the US? Last year 5.56 Million homes sold... I would have to say, we have a problem.
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Great question, sezme, a former mortgage broker....
