09.01.07
The Demise of Mortgage Insurance. What have we done?
With a weakened market and Sub-Prime mortgages written without Mortgage Insurance, Investors are in serious trouble. I read just this past week that for every million dollars in default loans serviced, many banks are losing about $10,000 a month in servicing and foreclosure costs. That is serious Money.(American Chronicle)
The Demise of Private Mortgage Insurance (PMI) Previously, loans with higher than 80% loan to value ratios had to have Mortgage Insurance, if bought by institutional federally chartered S&L or FDIC insured bank. Mortgage Insurance was required by Lenders when the loan did not meet the normal standards for the Lender -the most common reason being a smaller than 20% down payment. The insurance protected the Lender’s Note from losses if the Borrower defaulted.
Piggy Back Loans More recently, with the push to give credit, Piggy-back loans came into style. Piggy-back loans gave buyers the option to buy with NO $ DOWN. They could take out a First Mortgage for 80% and a Second Mortgage simultaneously for the remaining 20%. Lenders encouraged the process, saying it would save the borrowers from having to pay mortgage insurance, and they could Deduct the interest! Seemed like a good solution to the borrower. Seemed like a good solution for the lender - who gets two loans instead of one.
Wall Street Holds the Bag on the Mortgage Note. The Mortgage Note is the borrowers Promise to Repay. Since these borrowers have no equity in the property and payments are too high because the house value is dwindling, they have little to lose to quit paying on the Mortgage Note. With real estate values dropping, it seems like an easy solution to just walk away and let it go into foreclosure.
Unfortunately, Piggy-back loans are not such a good solution for Wall Street, who stepped in to take over the market when traditional Mortgage Insurance guarantees went-out-the-window. Now, a trillion dollars in default loans have unworthy borrowers behind them with no back-up for losses from Mortgage Insurance and the investor’s collateral has been divided among institutional portfolio investors, making collecting on all those bad bets virtually impossible.
Wall Street Holds the Bag on the Mortgage Deeds. Not only that, Wall Street is also losing the value of the Mortgage Deed – You know, that document that pledges real estate as security for the loan. As property sales prices drop, so does the value of the Mortgage Deed, and thus a dwindling in the integrity of the market.
Mortgage » The Demise of Mortgage Insurance. What have we done? said,
September 26, 2007 at 8:19 am
[...] Elizabeth wrote an interesting post today onHere’s a quick excerptWith a weakened market and Sub-Prime mortgages written without Mortgage Insurance, Investors are in serious trouble. I read just this past week that for every million dollars in default loans serviced, many banks are losing about $10000 … [...]