Thursday, October 30, 2008

Repeat question...


OK, so this blogger wondered aloud (in the 'Confused, and nowhere to go...' post on September 24th) re PMI, viz.:


"... When this blogger bought his house (at the height of the bubble!) he was assessed PMI, private mortgage insurance, because he only put down slightly less than 20% of the value of the home. This is insurance that protects the lender - if the borrower defaults and the lender is not able to recover its costs after foreclosure and sale of the mortgaged property then the insurance kicks in. OK, since the vast majority of near- and sub-prime loans probably have a loan-to-value ratio appreciably above 80% they would all require PMI. So, how come this blogger has not heard word one re PMI. Looks like the banks should be covered and that it would be the insurers that are screaming about "toxic waste"! However, they don't seem to figure into any of the articles and news - are Messrs. Bernanke and Paulson bailing out the banks or the insurers?..."

He is still wondering... and hasn't seen any mention of PMI anywhere in any of the multitudinous articles on the housing and financial crisis... PMI is, by definition, "... insurance to offset losses in the case where a mortgagor is not able to repay the loan and the lender is not able to recover its costs after foreclosure and sale of the mortgaged property..." If most/all of the defaulted and delinquent houses had PMI, are not the banks and financial institutions fully covered against losses?? True, they lose the income stream generated by the regular mortgage payments, but if they unload the property at a loss with PMI isn't the insurer is obliged to step in and make the bank whole? So, why are the banks hurting? How is the net, bottom line, effect of this any different from a hypothetical where the homeowner wins the lottery and pays off his/her mortgage in full? In both cases the payment would pass through and that mortgage would have to be 'retired' from the mortgage-backed security in which it was bundled with hundreds of other mortgages...

There's got to be something here that this blogger is missing... It seems to him that if there has been a big uptick in foreclosures (and there has) then it should be the insurance companies that are in a world of hurt and not the banks!

 
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