Private Mortgage Insurance, tell me again why I paid it?

By
Real Estate Broker/Owner with Respect Realty LLC 200311024

 

So many people over the pastcouple years saved money getting a 100% loan rather than an 80/20 or 80/15/5 loan. But, those who got that 100% loan were stuck having to pay PMI on their loan, which in reality, if they paid it down below 80% loan to value ratio, the PMI would be taken off.

PMI (Private Mortgage Insurance)

But, as many found out when the bubble started to burst, the 80% mark was going to be a lot harder to hit than they thought. With declining house values, that 80% value just wasn’t there anymore and they were stuck paying this PMI for a lot longer time than they had planned.

So, now they are stuck paying this insurance bill every month from anywhere between $100 and $200 a month, basically to protect the bank if the buyer should default. Just like in a car accident with a new car, the insurance is there more to protect the person who gave the loan rather than the person actually driving the car.

But, yesterday, I was being told by the negotiator of a short sale I’m doing, that they are willing to accept the terms the buyer has presented to the bank as long as the seller is willing to sign a promissory note for $25,000 with no interest at $101 dollars per month. I then asked for what? They said that is what the private mortgage company is requesting to pay them back for their loss on this transaction?

WHAT? Why has my client been paying the $176 per month for the past two and a half years for if the insurance company wasn’t going to actually pay if the home owner defaulted? 

Isn’t that what that insurance was actually put in place for in the first place?

So, we have sent it back to the bank telling them to take a hike as that is what that insurance is for and why he has been paying. If they don’t want to accept that, then they can have the home back according to the owner. I’m hoping it doesn’t come down to that, because this seller really has done everything the bank has asked to get this home sold and I know these buyers have been waiting way longer than I expected anyone to have to wait to move in to their new home.

It really would be heart breaking to have to tell them the bank is not willing to do this deal because my client won’t pay the insurance company back something that he already has been… a premium every month for just in case something like this happened.

What are your thoughts on this? Any suggestions?

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Re-Blogged 2 times:

Re-Blogged By Re-Blogged At
  1. Leslie Stewart 07/12/2009 11:09 AM
  2. John Martelotti 07/14/2009 09:56 AM
Topic:
Lending / Financial
Groups:
"Whacked"!!!
America's Best Agents
Club Chaos
Diary of a Realtor
Short Sale and Loan Modification Nightmares
Tags:
pmi
short sale
private mortage insurance

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Rainer
166,520
Fred Chamberlin
Guild Mortgage Co - Oak Harbor WA - Oak Harbor, WA
Oak Harbor/Whidbeynulls, #1 Experienced FHA Mortgage Consultant

Hi Todd,

Just a note in connection to Judy's comment above. PMI is still available, although very limited in who can get it, for 2nd homes. I still have access, as of today, but as she said, the rules keep changing. Right now, only one company will write these policies and only to selected customers.

Great conversation.

Jul 13, 2009 10:28 AM #84
Rainer
118,327
Ginger Moore
Wilkinson & Associates Realty - Gastonia, NC

Hi Todd, Nice informative blog!  I will have to check out this pmi situation.  thanks for sharing.

Jul 13, 2009 01:15 PM #85
Rainer
2,842
Evren Senol
Evren Senol Realty Group of RE/MAX Results - Town and Country, MO
Realtor

For the last 4 months, I have been working (with the listing agent) to get a short sale approved for my BUYER.  The bank has accepted our offer but the PMI company wanted $10,000 from the seller to approve the deal.  Seller does not have the money so we increased our offer hoping that the bank and PMI company can agree to resolve their differences.  A new BPO was done last week and we are waiting to hear.  I guess PMI companies asking for money is more common than I thought.

Sometimes I wonder if it is worth it to go through this process, shorten my life due to stress, and be asked by the bank to lower my fees!

Jul 13, 2009 01:19 PM #86
Rainmaker
565,777
Mike McCann - Nebraska Farm Land Broker
Mike McCann - Broker, Farmland Broker-Auctioneer Serving Rural Nebraska - Kearney, NE
Farm Land For Sale 308-627-3700 or 800-241-3940

Sadly, lost in most of the comments is the fact that someone is suffering due to a downturn in their local economy that was not of their doing.  With as many people as there are going broke and losing homes...pretty soon a Fico score won't mean anything.

The vast majority of families who took out PMI did so on the advice of two primary sets of people they trusted...lenders and real estate agents. They were shown all kinds of stats that said their home was going to increase in value and then they could cancel it in 2 years if they had 20% equity.

And of course that was going to happen because of skyrocketing values...eh?

There were mega ads in every paper and on tv every week...builders specials...lender specials...move in specials...zero down loans...etc. all across the nation. 

The buyer was duped.  He/she was convinced by others that they could afford the new house and the new car and even the PMI to protect them.

So for those of you who say don't blame the banks, or the Private Money Ingestors...I say blame them for their fair share of making it so easy to get a loan. Blame the people that convinced everyone that going PMI was better than FHA or VA or 20% down.

If PMI is a bond and I do not dispute that at all...it should have been called that...so blame those that named it wrong and allowed it to be so confusing and convoluted. Blame the closer who never explained what buyers were signing.

Blame the corporate structure, the board, the stockholders, etc. that pressures every business to have 10% or higher annual increases in profits...so of course the banks, lenders, PMI providers do not want to absorb the loss. Blame the feds...pick a party...they all share in the blame.

But please...don't say it is the buyers fault because they didn't have 20% down...if it wasn't required, then why would they?

Jul 13, 2009 01:59 PM #87
Rainer
4,985
Katherine Nickerson
Area Pro Realty - Rocklin, CA

Todd, will you keep us posted on how this ends up? I also tangled at the final hour with MI on the second loan and the buyer wanted the house enough to pony up $6k. Seller could only muster $1k and we "rich" realtors kicked in a grand each to make it finally close. (after we had our commissions reduced to 2.5%)

Commentors have enlightened me about the features and purposes of MI. (thanks for the lessons) What I will keep top of mind as I negotiate on behalf of my short sellers in the future is the fact that MI was required BY the lender to protect the LENDER in the case of FORECLOSURE.

My personal opinion is that the LENDER needs to settle the deficiency with the MI co. I understand thanks to Bill, that it is in effect a "bond", but it was a bond paid for by the buyer to protect the lender. Right? I should have fought harder against any of us paying. If the house becomes a foreclosure, the MI co gets nothing, right? Bill how would you have handled a demand from the MI co for $15k to save the deal? And now Todd, in light of this sterling discussion, would you do anything different? Hmmmm?

Jul 13, 2009 03:16 PM #88
Rainer
229,183
Ryan Shaughnessy
PREA Signature Realty - www.preasignaturerealty.com - Saint Louis, MO
Broker/Attorney - Your Lafayette Square Real Estate Partner

Mike - You have got to be kidding.  There is a little thing called personal responsibility.  Lenders didn't force borrowers at gun point to sign up for a loan.  They wanted to own and didn't have the money.  So, PMI was a dream come true.  It permitted them to purchase a new home with little or no money down.  Where there cases of fraud?  Yes.  But, I don't buy the argument that borrowers were duped into purchasing PMI thinking that it insured the borrower in case of default. 

Jul 13, 2009 05:06 PM #89
Anonymous
Pamela Damm

SteveDinielli, when you stated there is a diff. to short sale and foreclosure, I agree that that makes all the difference with the PMI. I also think too that the bank and PMI may be communicating to get the best results for them because after all no one wants to lose large amounts of money.  Sadly the owner is in a tough spot because he did sign his name to the contract agreement to PMI in order to purchase his home. But, I believe the real estate agent can be very helpful to the seller in negotiating a better outcome for everyone.

Years ago my husband and I bought a motel that was given back to the bank and sat vacant for 1 year. My husband went in to the bank with a very low offer, but convinced the bank that this was the best offer for them at that moment and how much longer would they want the motel vacant. They accepted the offer because it was better than nothing. When we went to sell the motel the courthouse records showed a lien on the motel from the old owner. Under great stress I found our contract and showed that we purchased the motel clear of all liens. I read through that contract serveral times before we signed it. We were in the right.

When I take buyers in to sign papers at the closing, it is overwhelming to almost all of them. They just want to get it over with and get the keys to the door of the house. If this has been a difficult subject for us realtors, including me, can you imagine what it is for the buyer. I seems very clear to me that PMI is not explained very well to a buyer from the mortgage loan officer. Now is it the realtors job to explain the finance part to the buyer. I don't want that responsiblity, but I can certainly encourage the buyer to ask the banker exactly what is does for them.

This was a great blog. I applaud Todd for bringing this up because all this communication between professional realtors is going to help us all become more informed and better at our job.

Bill, thank you for your wisdom also.

Jul 13, 2009 05:56 PM #90
Rainer
11,170
Tressa "Teri" Malone
Keller Williams Realty Premier Properties - Westfield, NJ
Westfield NJ Area Properties

Thanks, William, for educating us on PMI ... Apart from that, however, I think people who are under water on their mortgage should be grateful that the lender is lettting them off the hook and that they're being asked for a comparatively miniscule repayment of what they borrowned to get the house.

Come on, folks, don't we insist on "personal responsibility" with our children?  I have of course done a number of short sales, and I always let my sellers know that I am grateful, on their behalf,  that the lenders are not coming after sellers for the full amount of the personal loan that every buyer in NJ has to sign when he takes a mortgage. 

Short Sales are a nightmare for most Realtors and Lenders and sellers.  But there is no reason for sellers to slap the face of the people who are letting them slide on what is, in fact, the sellers' responsiblity.

We really need to change the "entitlement" philosopy that seems so prevalent these days. 

Jul 13, 2009 06:42 PM #91
Rainmaker
596,715
Todd & Devona Garrigus
Garrigus Real Estate - Beaumont, CA
Broker / REALTORS®

Forget moral hazards. We're talking about our economy and OUR industry, not to mention people's lives. This is why short sales need to be streamlined already! Mark my words, short sales will be the answer to a better recovery. Without them, too many people will be upside-down and stuck. I'm not saying the banks and investors need to take the bullet for every house that is upside down, but they still are playing hardball with the people that really need a short sale. And usually its the people that care about doing the right thing that want to short. The people that don't care give the banks the big "F" word. FORECLOSURE.

Jul 13, 2009 09:34 PM #92
Rainmaker
592,757
William J. Archambault, Jr.
The Real Estate Investment Institute - Houston, TX

Kathrine,

It depends!

I am a fiduciary for my client, I'd do what's best for the client!

Personally I like playing hard ball see comment #10.

Keep in mind the bank is your problem not the PMI company.

Bill

Thank you all for the kind words, I'm humbled.

Jul 13, 2009 09:50 PM #93
Rainmaker
212,926
Sandy McAlpine
RE/MAX EXECUTIVE - Cornelius, NC
Search Lake Norman Homes For Sale - Lake Norman NC

that's unreal. It's another case of the insurance companies trying to get out of the claim, or the bank not wanting to make a claim. I wonder if the insurance company even has enough funds to handle these.

Jul 14, 2009 02:44 AM #94
Rainer
7,481
Jose Belman Jr.
Salinas, CA
Jose Belman Jr.

PMI= Primate Mortgage Insurance,

It is meant to help pay the loss to the Bank. Not the borrower. THE BANK.

 

Jul 14, 2009 04:09 AM #95
Anonymous
Mary Lou Galea

Ryan, I tried to get a copy of the policy from the lender.  I even had my Regional VP try to get a copy.  The response from the lender was that the home owner had no right to a copy of the policy.  They provided a page showing that the house was covered under the master policy, that the borrower was paying the specified fee, but nowhere was there anything that disclosed the terms to which she would be held.

She did not sign any application or acknowledgement that she had even been told what PMI is or what her liability would be in case of default.

To demonize the buyers as at fault here makes as much sense as demonizing the parties after a divorce.  No one in these situations was trying to get out of paying their rightful obligations at the time they bought their properties. Mike is absolutely correct, there are a lot of people in pain.  But when they were working, bringing in the money, there was no intent or thought of default.  And there are still many people who got these same kind of loans, who haven't lost their jobs who are paying right on time and grateful that they had the opportunity to get into a home.  Should they not have had the opportunity because some others were going to have problems?  The situation was not in anyone's control.  But now the banks are looking to shore themselves up on the backs of the people they were more than happy to have as clients in the first place.

Jul 14, 2009 06:45 AM #96
Rainer
42,917
Brian Griffis
Realty Choice - Springfield, MO

Jose had it right.  PMI is to protect the bank, not the borrower, and of course they are looking to subrogate any loss.  Just as the bank does not have to accept the terms of a short sale, why should the insurance company have to accept a bad deal for them?  They don't, simple as that.  And just realize, if the buyer just "gives" the house back to the bank, the bank is going to sell it to some vulture, I mean investor for peanuts and then they can come back after the borrower for a deficiency judgment.  If there is any way to meet the bank half way, it might be good to negotiate.  A no interest loan may beat the alternative. 

Jul 15, 2009 02:22 AM #97
Rainmaker
202,807
David Monroe
Keller Williams Realty - Kirkland, WA
Short Sale Real Estate Agent

Pamela made a good point that buyers are often overwhelmed by all of the paperwork they have to sign at closing.  Most buyers are not mortgage or real estate professionals, so they often times don't understand everything they're signing.  They're emotionally attached to the transaction (excited about their new home or what they're going to buy with the money they're saving on their refinance).  Closing agents rarely explain the paperwork adequately to the buyers.

When I refinanced my primary residence a couple years ago, the closing agent told me, "I'm not trying to rush you, but you do have a three-day right of rescission if you read over the paperwork when you get home and decide you don't agree with the terms."  She was essentially telling me just to sign the documents now and read them when I got home so she could meet with the next client.  I told her that if I didn't read everything at the closing table, I wouldn't get around to it later.  While reading through the documents, I found two errors and over $3000 in additional fees that were thrown in.  I brought those up to the closing agent and refused to continue until the corrections were made.  She called the loan officer, and the loan officer made the changes and had the corrected paperwork over to the escrow company within 30 minutes.  If I hadn't stayed to read everything (which took me nearly an hour), I would have ended up paying an additional $3000 and may not have ever realized it.  I always try to be at closing with my buyers or sellers whenever possible, and I help walk them through all of the paperwork without being rushed by the closing agent.

My long-winded point is that it's human nature for buyers to be overwhelmed and confused when presented with a stack of paperwork at closing.  They're typically not trained to think like an attorney or real estate agent, and they're often thinking very emotionally, so it's not difficult for someone to get duped into signing paperwork that they don't fully understand.  (This doesn't apply to buyers that intentionally lied on a loan application or otherwise committed fraud.)

Jul 16, 2009 06:39 AM #98
Rainmaker
320,873
Cheryl Powell - The Powell Team
RE/MAX Executive - The Powell Team - Harrisburg, NC
Concord,Harrisburg & Charlotte NC Area Real Estate

I agree with everyone who said that PMI is there to protect the lender in case of default, not the buyer/owner.  I read an article recently that said Bank of America is starting to include an owner "promissory note" term in their short sale acceptance letters.  Hopefully this isn't going to become the norm in short sale deals.  If it does, then the main reason for an owner to pursue a short sale, rather than let their property go into foreclosure & risk a deficiency judgement, will become a moot point!

Jul 19, 2009 02:07 AM #99
Rainer
57,693
Tatyana Sturm
Exit Realty DTC - Aurora, CO
Denver Realtor, GRI, Denver/ Aurora CO Relocation

I have ran into the short sale situation that if the bank is getting less than 80% and there is mortgage ins, the bank will let it go to foreclosure to collect the ins.

Jul 20, 2009 02:58 PM #100
Rainer
4,985
Katherine Nickerson
Area Pro Realty - Rocklin, CA

Wow. That brings up a good question. When the banks are covered for foreclosure, what kind of coverage or payout amount do they get when the foreclosure happens? Do they actually get a significant payout if the home goes into foreclosure? Anybody know?

Jul 21, 2009 03:10 AM #101
Rainmaker
202,807
David Monroe
Keller Williams Realty - Kirkland, WA
Short Sale Real Estate Agent

Tatyana, I had a short sale approved recently where the lender accepted 60% of the principal balance, and the lender was covered by PMI (and the PMI company agreed to pay the loss claim).

Lenders can get payouts from PMI whether the property is sold as a short sale or at a foreclosure sale.  PMI policies can be purchased with different coverage amounts.  I believe that a lender's decision to let a property go to foreclosure rather than accepting a short sale is just a question of which situation would cause them to lose less money, and that may be tied to what the PMI company will approve.

It's also my understanding that the lender won't get paid from their PMI policy until the house is actually sold (through a short sale, foreclosure sale, or as an REO).  Can anyone else confirm that?  The lender wouldn't know what their actual loss is until it is completely off their books, so how could they get paid on a PMI claim when they don't know the amount of the loss?

Jul 22, 2009 09:00 AM #102
Anonymous
Vince

I am not a realtor, but I have been in the lending business for a little while now and recently short sold my primary residence in Las Vegas, NV. I purchased it for $290,000 (100% LTV, one loan with PMI) three years ago and it closed a month ago for $140,000. The bank actually ended up netting about $123,000 after all closing costs and commissions were paid. I was also required to sign a promissory note of $15,000 payable to the PMI company over a period of 100 months. Considering the amount of the deficiency, the fact that I was given a full release from the original note, and the fact that the bank waived all deficiency rights, I immediately agreed. While my wife and I went through a couple of rough patches financially, there was no true hardship as we could afford the monthly payment but why throw money into a black hole. Our rent is almost exactly $1000 less than out total monthly payment (mortgage, PMI, and impounds) and even paying the $150 a month to the PMI company we are still $850 better than we were before. Here is the kicker, we like the new rental house better than our old place. My note goes into effect on June 1st and I am willing to bet that the PMI company will end up selling this debt to a 3rd party of some sort and if and when that happens I will offer a lump sum settlement for say 25% of the note amount to see if they will bite.

May 20, 2010 07:17 AM #104
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