For first-time home buyers especially, this little thing known as PMI (Private Mortgage Insurance) is a surprising little “gotcha” that happens when you’re buying a house. Jverojoe asked this question in Zillow Advice recently:
Simply, PMI is what you have to buy if you are putting less than a 20 percent down payment on a house. Read more about PMI in Zillow Mortgage Marketplace.
So PMI is designed to cover the lender in case the borrower defaults right? I haven’t read a signle article on how the issuers of PMI are doing or how that played into the mortgage mess. I would guess most foreclosures were on people who had less than 20% down and or exotic loans. So, why didn’t PMI cover some or all of these losses?
Brian: Great question. Here is an article from the Wall Street Journal that touches upon the issue you raise, but you’re right, I would think PMI companies would be in a world of hurt right now.
http://online.wsj.com/article/SB124482038723610165.html
From the Article:
“These policies protect the lender in the event of a default, covering anywhere between 12% and 35% of their losses on the property, says Keith Gumbinger, vice president at mortgage information firm HSH Associates”
But a insurance provider says “As a mortgage insurance company we stand in the borrower’s shoes”
Seems like a conflict of interest. If the home had equity, the insurance provider would not care if it went into default. Now that they stand to lose money, seems like they are doing everything they can to prevent foreclosure, or lose money themselves.
Also, If you get an FHA-insured loan, you are effectively paying “PMI” in the form of a higher interest rate, since the FHA guarantees your mortgage in case of default.
I wonder how this actually works. If I foreclose on a $100,000 loan. Assuming my PMI covers 35k, theoretically the bank could only come after me for 65k right? At least that is how it sounds, but I suspect the lender would collect the 35k and put a 100k judgement against me. I wouldn’t put it past a bank to screw the consumer over twice.
Have you mentioned the largest issuer of PMI insurance has ceased writing new policies and is winding down their existing business due to excessive losses?
If you cannot afford to put down 20%, don’t buy a house.
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