Home loans with low down payments require PMI insurance, so why are banks losing money on sub-prime mortgages?

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A home loan with less than 20% down requires PMI (Private Mortgage Insurance). Since most “sub-prime” mortgages would require PMI, why are banks losing so much money on these loans? Shouldn’t it be the insurance companies that lose the money?

2 Comments
  1. Reply
    Lisa L
    February 8, 2011 at 8:48 pm

    Most sub prime loans don’t have PMI. They put them in 80/20 loans, Interest only loans, adjustable loans that they couldn’t afford when the first adjustment period happened, & other ridiculous loans with negative amortization. Those buyers wanted what they wanted when they wanted it & never looked beyond the first payment. Many of them are as guilty as the lenders.

  2. Reply
    CINDY W
    February 8, 2011 at 9:44 pm

    There isn’t any PMI on subprime loans, so the answer is NO. A few years ago when the subprime market was at it’s peak, millions of these loans were underwritten and approved. They were typically 2/28 ARM loans and PMI insurance companies would not even insure these loans. The interest rates were high to start with, but fixed for 2 years. The plan was for the borrowers to clean their credit up before the 2 year period was up and then to refinance into a low fixed rate mortgage. Unfortunately, this didn’t happen and borrowers who could barely afford the initial payment, certainly couldn’t afford the increased payment when the adjustment took place.

    PMI insurance is for credit–worthy loans, not subprime loans.
    Banks are losing so much money on these loans because people can’t afford the new and higher payments and are walking away from their homes. Foreclosure is at an all time high everywhere.

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