Private Mortgage Insurance Didn't Work?

[Exile]

For all that I've read and heard about in the sub-prime mortgage crisis, it recently occurred to me that I haven't seen anything about p.m.i and the role that it played or didn't play in this meltdown.

I thought that purpose of private mortgage insurance is to protect the mortgage lender and pay off the balance if the borrower defaults. I also thought that the buyer is required to carry it if the down payment for the property is less than 20%. The latter was my own situation when DW and I bought a home in 1984. Perhaps the rules have since changed?

I understand that p.m.i. is dropped when the property value exceeds that of the loan balance and/or when the buyer has paid 20% of the loan. Could it be that durring the real estate bubble, values of property including those purchaed through sub-prime loans were inflated to an extent that the p.m.i. was dropped from those loans, hence leaving the lender high and dry when values collapsed and homeowners defaulted en mass?

Anyway, can someone please set me straight about what p.m.i. did or failed to do in this mess?

[cptacek]

Good question. I don't know...but look forward to others thoughts.

[tripods68]

Originally Posted by Exile

I thought that purpose of private mortgage insurance is to protect the mortgage lender and pay off the balance if the borrower defaults. I also thought that the buyer is required to carry it if the down payment for the property is less than 20%.

PMI only insures the first 20% of the loan NOT the entire mortgage loan amount. For example, if you put down 5% or $15K on $300K mortgage, PMI will cover the additional 15% or $45K required that you didn't put down. On event that the borrower default on the loan, PMI pays the lender 15% or $45K to the lender.

When we bought our house we put down 7% and were required to carry PMI back in 2003. PMI requires you to pay at minimum for 5 years or when the equity reach 80%. But our house appreciated so fast after a year, we were able to refinance PMI was dropped. Now things are so much different.

[Exile]

Originally Posted by tripods68

PMI only insures the first 20% of the loan NOT the entire mortgage loan amount.

Aha! I knew that there was something wrong in my assumption. I guess that I had forgotton how p.mi. works as DW and I sold our home in 2000 and have been renting ever since.

If p.m.i. covers only the first 20% of the loan, no wonder it didn't make a dent in the massive number of mortgage defaults.

[momof1in150]

PMI was avoided a lot of times because a second mortgage was taken out. If you put 10% down, financed the first loan at 80% and then took a second loan for 10% then you didn't pay PMI. You paid a higher interest rate on the second but it is less then it would have been with PMI.

Part of the problem was people took Adjustable Rate Mortgages (ARMs) and when the ARMs adjusted the payments skyrocketed and they couldn't afford their mortgage. The other issue was Interest Only Loans. They only paid the interest on the load for a specified time and then their payments went up when you added the loan into the payment.

These loans put people into houses that they couldn't otherwise afford which is a big part of the problem.

[tripods68]

Originally Posted by Exile

Aha! I knew that there was something wrong in my assumption. I guess that I had forgotton how p.mi. works as DW and I sold our home in 2000 and have been renting ever since.

If p.m.i. covers only the first 20% of the loan, no wonder it didn't make a dent in the massive number of mortgage defaults.

That's right. As I thought of this mortgage meltdown--WallStreet didn't really do their homework clearly and if they really smart, they would have passed the risk directly to the insurance companies.

WHat lenders didn't do good job was protecting themselves by requiring borrowers that took out sub primes mortgages carry out mortgage insurance for the life of the loan. Lenders would have indemnify themselves completely and in the end saved Wall street. We wouldn't probably need to whole Trillions of bailouts. Remember if CDOs and SIV were issued as collaterized loans on back that borrowers would continue paying mortgages on time. It would still hold values because insurance companies would have paid out the entire mortgage loan amount in case of default. We all know insurance industry are highly regulated and reserves has to be maintain for every policies they write. With those losses, they simply jack up their premium cost for every policyholders. But again, we will never know.

That's my 2 cents.

[Gruntina]

I know those who have pmi have gotten letters in the mail lately. The letters are stating the insurances are lowering their insured balance now that homes cost less and therefore cost less to rebuild or repair by square footage.

I have no idea if this lowered their monthly pmi though.

[JinCO]

I have purchased 2 homes with less than 20% down and have never paid PMI. All you have to do is take out 2 loans to avoid it. I'm sure many people taking out subprime loans were doing the same thing.

[marvholly]

I know of instances like JinCo relates. DD2 & hubby to be bought their house in spring 2004. Put down 5% (loans from parents)-paidin <6 months for this parent). Took out 80% first mtg and remaining 15% on additional loans (I do not know how stated/terms/splits....-as a MIL I for once kept my mouth SHUIT!!!).

[Snave]

This topic came up a couple weeks ago on talk radio when I was listening in the car. They also stated a lot of it had to do with borrowers taking out 2 loans to avoid pmi.

[Coleroo]

My husband and I were able to get our home with a 100% fi, no down, no doc, NO pmi loan back in march of 2006 as first time home buyers. It was so unbelievably simple....

The first loan they offered was the "2 mortgage deal" (with the balloon payment and ARM and no pmi). I refused that one, and told my mortgage broker what I wanted instead and it was given to me. Simple as that. They gave me a mortgage on my terms, and seemed to bend over backwards to do it. It wasn't like I had outrageously good credit either - I was at a 710 FICO at that time. (To boot, I was only 23 years old)

If it was that easy for me, i imagine there were millions of others out there taking the no pmi dual mortgage or simply saying they didn't want PMI - and that's what happened.

They (the bank) had no clue - and could have cared less - if I had plans or means by which to pay back that mortgage. I didn't even have to produce any tax returns or anything.

So...in light of everything, PMI seemed to have no worth at all.

[Johansen8]

PMI only pays the balance of the loan down to 80% which is why it is only required if your loan to value ratio is over 80%. In the days before PMI, you pretty much had to put down 20% to buy a home, but PMI came along and it covers that portion. Most of the time, the bank will list the property at about 80% of the value so that they can get rid of it quickly.