Tuesday, November 18, 2008

The answer?

This blogger has wondered about PMI for quite some time (see blog entries 'Confused and nowhere to go' from September 24th; 'Repeat question' entry from October 30th; and 'The money PIT' from October 31st), but has not seen any discussion related to it. Finally! An answer, sort of... NPR's Planet Money had an episode the 17th that asked this question of an economist, Hampton Finer, from the New York State Insurance Department. He hemmed, and hawed, and appeared to point to a number of issues re why PMI isn't bailing out the banks, including the following:
  • First he implied that PMI did not cover the banks' entire loss. As this blogger understood it, PMI was supposed to cover the loss suffered by the bank (or lending institution) if it had to repossess the home after default and then foreclose and sell the home, i.e. make the bank whole. This economist implied that there was a cap of some sort (unspecified as to if it was some $$ threshold or a percentage of the home mortgage balance), so apparently as the market has crashed the loss on the foreclosure sale was greater than the coverage and so the banks' recovery rates were lower...
  • Then he pointed out the timing issues i.e. the PMI payment kicks in only after foreclosure sale and the bank has to "carry" the loss for quite some time before seeing the payments...
  • He also implied that the insurers underwriting these programs are in financial difficulties and so the chances that the banks will get the monies due is getting more problematic.
  • Finally, he seemed to suggest that the banks, seeing these insurers getting fat off PMI premiums (when the default/foreclosure rate was low), horned in on the action by taking part of the premiums and part of the risk as well. So, now when the default and foreclosure rates are soaring the banks are reaping what they sowed.
Additionally, in the comments some folks pointed out that some loans were structured to get around PMI requirements (e.g. 80/20 loans, etc.) The episode was most unsatisfactory - Mr. Finer didn't come out and clearly list the issues and answer the question. The interviewer appeared to have prise the information out of him, and many of his statements were qualified and hedged...

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