Explaining Mortgage Insurance And How Comes Into Play With A Short Sale
First, let's define what Mortgage Insurance is. There are 2 kinds of Private Mortgage Insurance (MI).
- BPMI. Borrower Paid Private Mortgage Insurance
- LPMI. Lender Paid Private Mortgage Insurance
MI coverage can be for 20% or more of the initial loan amount. MI offsets the loss incurred by the Lender/Investor when a mortgage loan defaults.
For example: Mr Smith (Borrower) purchased a property for $200,000 in 2004 and put 20% down. His mortgage was for $160,000. Federal Trust Bank (Investor) bought the loan from Wells Fargo (Lender/Servicer) and decided to protect their investment by purchasing MI for 32% of the loan amount. So Wells Fargo buys an insurance policy (LPMI) from Genworth Mortgage Insurance Company. As part of this insurance agreement Wells Fargo gives Genworth the authority (delegates) to decide whether a defaulted loan is foreclosed on or a Short Sale is accepted.
In 2010 Mr Smith goes into loan default and attempts to do a Short Sale. Even though the Investor, Federal Trust Bank, now owns the loan, Mr Smith still makes payments to his "Lender" Wells Fargo. His REALTOR(R) finds a buyer and submits the Short Sale request to Wells Fargo. Wells Fargo submits the request to Federal Trust Bank. Federal Trust Bank has to submit the Short Sale to the MI Company, Genworth, who has the final authority.
Remember the Mortgage Insurance Company is paying out on the amount of the loan NOT the value of the property.
Let's assume that Mr Smith's property is now worth 50% of what he paid in 2004. Just for reference, in my market of Poinciana Florida, the value would have declined about 80% during this period. 50% is being conservative in the hardest hit areas. Anyway......
The initial loan was for $160,000. 32% is guaranteed by Genworth. That's $51,200. The insurance payout is $51,200 whether foreclosure, Short Sale or Deed in Lieu.
The Short Sale request is for $90,000. This amount is the purchase price of $100,000 (Fair Market Value) minus 10% in selling costs.
In this scenario the Investor will get $90,000 + $51,200 = $141,200. Plus any incentives like HAFA. ***By the way, interest on a 30 year loan at 6.5% for the first 5 years is over $60,000!!! So the Investor will actually MAKE money on this Short Sale.
The Lender/Servicer, Wells Fargo, also made money. They made money when they initiated the loan. When they sold the loan. And when they serviced the loan.
The loser is the Mortgage Insurance Company. They are being asked to pay out $51,200. To offset this they may very well ask Mr Smith to make a cash contribution and/or sign a promissory note. If he refuses then MI may choose to offset their loss by allowing the property to go to foreclosure. MI can then pay out the same $51,200 in the future using future money. This is the time value of money.
In this Short Sale example the only entitty that lost money is the MI Company!!!
The lesson here is: When the MI Company requests a cash contribution and/or a promissory note the Borrower will more than likely have to pay something or the Short Sale will be denied. Get it?
Comment
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Comment by Mike Childs on September 28, 2011 at 10:18am
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How do you determine if MI exists on the loan? where can I learn more about using "A Formal Declaration of Mortgage Insurance"?
Thanks for the post and comments. These forums are invaluable.
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Comment by Kelly Magreevy on September 9, 2011 at 2:51am
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UPDATE: right after I wrote this blog I got an immediate response from Citi that the PMI company is Radian and they have approved the short sale to move forward now waiting on junior lien approval. I ran the numbers using a 32% rate for PMI and the company is going to take a $108k loss. So taking a poll, what do you think the cash contribution or prom note is going to be? Or do you think that they won't ask for one? anyone want to play? :)
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Thanks for this scenario. So I pick and choose my short sales very carefully and for that, I have 100% success rate. Should I avoid the short sale with PMI after I run the numbers? My sellers in the past have not paid any contribution (and I always warn that they may have to pay something at the listing appt) with the exception of two: one was for $848 and the other was for $2k. Both sellers were happy to pay it. Back in 2007 a prom note was signed for $2k and that was my very first short sale. Haven't seen a prom note in a while but I have had the negotiator with B of A come back asking for $10k. I have my clients write up a hardship letter why they can't pay it and then I don't see that request again. Who has had success with PMI companies? What is the difference between the approvals for a BPMI or a LPMI? I am waiting on one of my short sales with an approval from the MI right now and I believe it is LPMI. I just sent an e-mail asking the Fannie Mae agent (who is awesome and gave me his personal number to stay in contact) and the negotiator asking for the name of the PMI company so I can do some good research and search blogs on success or failure for the short sale so I can prepare all parties. I will be so bummed for my seller if this gets shot down over MI. Please advise what I should do next time on my listing appts. Thanks! Also what is this document called the Loss Share Agreement about? My next short sale is with Indy Mac as the first and Citi as the second. My current short sale regarding the MI is Citi and there are two loans.
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Comment by Seth Russell on May 2, 2011 at 11:59am
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Thanks very much for clarifying this very common obstacle to short sales. Of the short sales we've handled since 2008, we've only lost 2 sales to MI...The moral of the story-vet the client and lender from the start and determine if MI applies on a loan..whether it is :LPMI or BPMI this often is the deal killer. We encourage the use of a formal 'Declaration of Mortgage Insurance' to determine if any apply on a listing.
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Comment by Deborah McKnight on May 1, 2011 at 3:29am
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I love this explanation....please address the issue if there is a second lien holder.
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Comment by Jeff Payne on April 28, 2011 at 5:04am
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Bryant, good information. The investors don't always lose on a short sale.
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Comment by Thom Colby CA Brkr 888-391-5245 on April 28, 2011 at 3:51am
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Bryant - Great post - Information like this, along with examples, are terrific in helping inexperienced Brokers and Agents as to how the "system" actually works. I use something similar when explaining the IndyMac / OWB Loss-Share Agreement.
Good Stuff - thanks !
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