Comment

Comment by joe beauchamp on August 6, 2011 at 9:07am

Thom, even if what you say is true (MI being part of the bank - I don't know, don't care), the bank using this for a wall of silence goes against the truth in lending act.  When I run into this, I point out that it is a federal crime to hide who this "lender" is demanding money anonymously as an MI.  FEDERAL.  The bank is expecting the seller to pay money to some Uncle Fred that the bank refuses to disclose to make the sale work?  NOT LEGAL.  Take name, escalate.  Eventually, you will get a name of someone who doesn't want to show up in court and defend the bank's illegal position and then you can get info.

So, I don't care if the MI is on the side, done by the bank or someone's mother.  If they are in the way of the sale, by federal law, they have to prove that they should be and prove who they are.  Otherwise, as usual, it is just a ploy to get you to pay up and not ask.  As in "Yeah, ya gotta pay my uncle $10K if you want to do this deal...."

Comment by joe beauchamp on August 6, 2011 at 9:00am

Michael, yes, in theory, that could be, in reality, it is not so.  As I said, I dug into it.  One of our short sale people is connected to one of the big mortgage companies.  The deal was for only a few and it was when the 2nd mtg was with the same company as the 1st - only a few.  A rarity.  No reason for this senior VP to lie to his son <ahem> about such stuff.  So, while what you say is the logical way to look at it, unless you are a real insurance company, it isn't so.  This setup is extremely rare.  Again, think about it.  The 2nd is getting 12% because it knows it is risky.  If you are the insurance co., what they heck amount are you going to charge so that on the average, you can expect to make a profit by being the MI?  A whole lot more than that 12% thing.  And what bank is going to say, OK, I'm getting 12% so I'll pay 15% to an MI to insure it against loss.  It sounds logical until you think through how insurance companies work and the numbers involved.

But, as I said, I dug into it and asked top people who would know.  Regardless of theory, what I stated is what I learned.

Comment by Thom Colby CA Brkr 888-391-5245 on August 6, 2011 at 7:03am

Many of the lenders own an MI company - that why sometimes you can't "talk to the MI company" because it's in-house.  They don't disclose it because they don't have to as it's no charge to any consumer.  So in these cases, it's the left pocket paying the right pocket at the same company.  They get to write off the cost of the premium as an expense and eventually get to write off the loss BOTH at the MI Company and at the Lender.

 

As for the lender taking out MI on a risky loan, it's no different than an individual who made an investment in a business based on the expertise of a single individual.  Those investors typically take a life insurance policy on the person who has the intellectual property in the event they die and the business fails. 

 

For example, let's say a Real Estate Broker opens a Brokerage which is backed by an investor who knows nothing about the Real Estate Broekerage business.  The investor is simply making a monetary investment and puts up $1Million.  At the same time or shortly afterwards, the investor 99 times out of 100 will take a $2Million Life Insurance Policy on the Broker, because the investor has to protect his investment in the event the Broker dies.  This not uncommon in any business. 

 

Similarly, most Hard Money Lenders take a Life Insurance Policy on the Borrower with the lender as beneficiary, especially on larger loans.  Again, if the borrower dies, they recover their loss.  If the loan defaults and the investor loses their investment, they will typically keep the Life Insurance Policy in place so that eventually,,,,,,,,, they recover their loss.

 

So, on Mortgages, the lender is simply protecting their investment by covering any future loss with MI.

 

Thom Colby

Broker

Newport Beach CA

Comment by Katerina Gasset on August 6, 2011 at 6:14am

@Catherine- The lenders can get MI insurance after the fact. They have the right to take out MI insurance without the seller's consent as long as the fee for it is not added to the seller's mortgage payments. When the markets started crashing the lenders started to buy MI insurance on their notes so they would have some protection as the values fell. So the original paperwork is not in question when the lender takes out MI insurance after the seller closed. There is nothing illegal about protecting the interests of their investors and shareholders.

Comment by Michael Schneider on August 6, 2011 at 5:42am

@Joe  I think these policies would have been taken out in the "good old days", before the MIs realized they were being snookered by Investors.  These policies were availabe back pre-2008.  Eg, Citi insured their second-lien portfolio, at least, some of it.  AIG was a major player in that market.  But, no concern there, we're happy to pay for that. right?

Also, much of the volume in Trusts have MI.  And, 2nd were securtized along with the 1st.

The MIs may not like losing money, but surely by now they have come to accept that as their lot in life. The goats of the mortgage crisis.

(Anyone else watching PMI, MTG, RDN.  Think "fishing line with lead sinker".)

Post in the style of Joe, as I always enjoy Joe's posts.

Comment by joe beauchamp on August 6, 2011 at 5:27am

Steele, I run into a lot of bull at BOA - this is one of them. Only under extremely unusual circumstances did banks take out their own MI for an entangled 2nd lien.

Just apply a little logic to this - you don't have to dig into it as I did.  What insurance company is going to look at any of these banks and offer to insure a 2nd that is a risk even when times were great?  Insurance companies don't like losing money.  Do you really think that they knock on BOA's door asking to get a good piece of the losses?

Sometimes an MI can be a pain, however, banks often use them as the big bad bogeyman - it isn't us or the investor, it is this MI and we have to do what they say - no, you can't talk to them, only we can.  And we summon them at the campfire.  They will tell you what you must pay..

An MI for the 2nd sounds great from the bank's side.  What we don't think of is that they have to dupe some insurance company into signing up for 99.9999% chance of experiencing losses.  (I haven't seen the Geico commercials for homeowners to insure against losses when they sell their homes...)

Comment by Kylee Roe on August 6, 2011 at 5:12am

Seems to me the MI company, insuring a second stands to lose a lot of money. How many buyers and/or sellers in the short sale scenario can, or are willing to ante-up the funds to get the insured 2nds approval? Sometimes that amount can be several to tens of thousands of dollars. All they are doing is insuring more foreclosures are coming.

Comment by Steele V. Propp on August 6, 2011 at 5:01am

The MI company now has a say on negotiations, Sylvia.  As to lenders taking out these policies, not only is it legal, it's smart on their part.  They are getting screwed on these secondary liens (yes, yes, I know it is easier to pick on the banks then defend their rights).  This is a good move on their part.

 

And frankly, according to one of the real estate legal groups I watch, they don't have to tell the borrower.  They are just protecting their interests in dangerous times for secondary loans.

Comment by Sylvia Barry on August 6, 2011 at 3:54am

Elizabeth - I jumped into this discussion.  What kind of effect does MI have on the negotiation?  Thanks! Sylvia

Comment by ElizabethWeintraub00697006LyonRE on August 6, 2011 at 3:48am

Here is something I'm betting you guys don't know. The thing is Bank of America is taking out mortgage insurance on those old second mortgages. Without the seller's knowledge nor consent. And they can do it, so they are. I've been running into this over and over on these second mortgages. That mortgage insurance is THERE.

Elizabeth Weintraub

Lyon Real Estate

Broker-Associate #00697006

Lyon Real Estate is not associated with the government, and our service is not approved by the government or your lender. Even if you accept this offer and use our service, your lender may not agree to change your loan.

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