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?
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Comments
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.
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 !