Isn't PMI to protect the lender?

[blueinindiana]

I have a mortgage with less then 20 % down and had to get PMI so in case it foreclosed the bank would not loose money.

So I assume these risky loans had PMI too correct?

So why don't PMI cover the losses?


Maybe I just don't understand PMI al that well.

[DianeG5385]

1. PMI does cover the losses. It's the selling and packaging of loans into securities that is the prob

PMI will pay the lender the first 25% of any loss upon borrower default. Anything in excess of 25% is the lender's problem, therefore it is in the interest of the lender to "sell" the loan and offload the risk. (Fannie and Freddie were buying loans and packaging them into securities to enhance liquidity and availabilty of mortgage money)

An MBS (Mortgage Backed Security) is priced (the rate of interest that is paid) based on the quality of the loans that underly the security. It assumes an ultimate claims rate, that is the percent of loans that will default and ultimately end up in foreclosure. The interest rate on the security is based on the loan quality, e.g. fico score, loan to value percent, income documentation, etc. The lower the quality, the higher the interest rate. the less underwriting that was done on the loans, however, the higher the interest rate an investor would get. The payment on the loans by borrowers funded the interest payments on the security to the investor. The investor in this case is the source of the liquidity, providing funds to generate additional loans. The problems in short are due to assumptions that the real estate market would continue to be strong, and that the default rate would be within the assumed range. This proved to be dead wrong when the real estate bubble burst due to the huge amount of bad loans that were written between 2003 and 2007 due to lax underwriting standards.

Back to PMI some of the underlying loans had PMI, but not all did. The securities obtained additional credit enhancement (CDS Credit Default Swaps) but the protection buyer was not always the holder of the obligation. What we have effectively is unregulated insurance contracts that can't pay off and hence, the whole thing is collapsing because it is impossible to tell what the true worth of the underlying mortgages is in the current real estate market.

[jobycom]

2. PMI only applies to first lien purchase mortgages with less than 20% downpayment.

PMI is required on purchase loans (not home equity) where the loan is over 80% of the value of the house, because those are the riskiest loans, and because the lender will sometimes not get enough back in a foreclosure to cover more than 80%. The PMI covers only the difference between what you owed on the mortgage, and what the foreclosed house sold for. So, you have an 80,000 mortgage, the house sells for 78,000, the lender can get the other 2,000 back from the insurance fund. The idea is not only to protect lenders, but also to encourage lenders to make more loans to low income families or first-time mortgage holders with low or weak credit ratings. The lender is risking less by doing so.

However, PMI doesn't apply when the loan is 80% or less of the value of the home, or to second lien mortgages (like home equity loans). Also, with property values falling, a loan that was once only 80% of the value may wind up higher than the value of the house. So for most mortgage loans, PMI doesn't help.

As for you, I hope you realize, you can get the PMI dropped once your loan debt falls below 80% of the market value. That can come from you paying down your loan to 80% of the value, or from your house appreciating in value... Something which will one day begin to happen again. So keep an eye on property values in your area, for when they start to rise. Also, a PMI loan will have less favorable terms than a regular loan, so when you get to 80%, think about refinancing, and you might get a better rate. You'll have to calculate whether you'll be in the house long enough for the lower interest rate and lack of PMI will cover the finance costs on a new loan. There are a ton of calculators online for that. Try Bankrate.com, for instance.