What is the purpose of PMI (private mortgage insurance)?

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I have a question. All conventional mortgages when the buyer has reduced to less than 20% deposit is required to buy PMI (private mortgage insurance) which is to “protect” the lender against loss if the borrower defaults. When an FHA loan, they are insured by the federal government. Given this, why not instituitions ready to collect their losses from insurance companies? Does the government does not support the FHA loan? Please help me understand why, but now buyers need PMI, lenders require that we help?

  1. Reply
    February 5, 2011 at 5:27 am

    Well, they ARE collecting, when PMI is in place. The PROBLEM is, with these substandard loans, the mortgage brokers were convincing people to “avoid” pmi costs, by taking TWO mortgages – the second would be for 20%, the first for 80%. So many, many of these loans, have no PMI coverage!

    Plus, before the lending institutions can collect, they have to foreclose and auction off the property – and that costs money, for EACH property.

    The lenders are asking for help, because of Sarbanes/Oxley – SOX. The LAW says, the lenders have to report the “value” of the loans. Well, when no one wants to buy the loan, the “value” is zero!! So that makes it look, on paper, like their assets have dropped dramatically. They can’t convert that zero into the property value, until after they foreclose and auction off the property

    It’s not TRUE, in reality, that the loan has dropped to a zero value, because the PROPERTY is still worth something – it’s just no one wants to buy the mortgage on the property.

    SO, the PMI doesn’t apply. The mortgage doesn’t even have to be in default! It just has to go to “not sellable”, for the lender to not be able to use it as an asset. And with all the subprime market fallout, well, no one is buying mortgages, especially the higher risk ones.

    Hope that helps.

  2. Reply
    February 5, 2011 at 5:43 am

    Not all the loans were covered by PMI:
    1. As you mention, if the buyer put down at least 20% as a downpayment, no PMI was required.
    2. Once the person has paid enough to reduce the outstanding balance below 80% of the price of the home (in other words, once the downpayment plus the amount of the loan that has been repaid reaches 20%), the person can cancel the PMI to save money.

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