Thursday, July 14, 2011

Mortgage Insurance Role in the Foreclosure Process

There is a lot of mis-information about PMI and its role in the current foreclosure environment. When you purchase a property and obtain a loan for that property and that loan exceeds 80 percent of the value of the purchase, the lender will require you to pay for private mortgage insurance ("PMI"). PMI is only for the benefit of the LENDER. Sometimes, the LENDER purchases PMI (sometimes referred to as MI-mortgage insurance) and the home owner is not even aware of it!!

PMI does not cover the owner of the property. It only insures the lender for the portion of the loan that exceeded 80 percent of the value of the property on the date you obtained the loan. If you fail to make your payments or walk away from the loan and never pay it back or if you sell the home for less than the value of the mortgage, the lender has insurance on that portion of the loan.

When a home owner fails to make payments with the first lender, that lender files a claim with the PMI company. The PMI company may have paid off that claim with the first lender and the lender then sold the loan to a new lender.

That new lender has the right to collect from you the full amount owed under the loan. In some cases, if the PMI company paid off the claim, the PMI company could come after you for the repayment of the amount paid to the first lender for the PMI claim.

Now that the loan has been sold off to the second lender, you still have the obligation to pay whatever debt is owed to that lender under the forbearance agreement.

Exceptions to Repaying the Note. There are some exceptions in which the homeowner might not have to pay the full amount of the loan back to the lender. One of these exceptions is when the lender and borrower no longer have the duty to repay the full amount, when the borrower files bankruptcy and all or part of the loan debt is released or in some states where the lender can only go after the property and can't go after the borrower for a deficiency judgment.

In another scenario, if a home owner has not been able to repay the loan and the lender has foreclosed, or if the home owner has sold the home for less than the amount owed under the loan - a "short sale" -- and the lender agreed to accept that short amount as full payment for the debt and agreed not to go after you for the shortage, the lender would not be able to go after you for the additional money.

You must also keep in mind that in many states the lender can still go after you to get the repayment of any amount owed under the Note. And if the PMI company paid a claim to the lender, the PMI company can come after the home owner for the amount paid out on the claim.

1 comment:

  1. Hi,

    Mortgage insurance helps lower and moderate earning families to become house owners by reducing certain charges related to conventional mortgages. This paper argues that a systemic weakness in the way the mortgage finance system currently deals with default risk has contributed greatly to the current mortgage crisis. Thanks a lot...

    Mortgage Note Buyer