The Next Mortgage Bombshell

[chinaco]

Barrons Article about the PMI Industry.

The next domino likely to topple is the so-called private-mortgage-insurance industry, which permits buyers to purchase homes without making a full 20% down payment. Private mortgage insurance covers the first 25% of a mortgage's value against default, plus accrued interest. Some $700 billion of U.S. mortgages carry such insurance, with most of it owned by Fannie Mae and Freddie Mac and backed by the federal government.

The Next Mortgage Bombshell - Barrons.com


MBS, PMI, Shortsales, Foreclosures.... what a complicated mess. No wonder it will take years to clear the mess up.... untangling who owns what and who owes what looks like a nightmare.

 

[rescueme]

At the risk of being censured (again), I'll just make this simple statement, based on my belief.

If you can't afford 20% down payment (e.g. "buy in") you are trying to buy property you really can't afford.

PMI is nothing more than "insurance on losers", or those that want to live today, on tomorrows "possibilities" (e.g. higher income, higher property value, etc. in the future.)

OK, I/DW are prejudiced. We've purchased four homes, over 40+ years of marriage and never had less than 20% down in each case. In fact, our current (retirement) home had over 50% down when we signed the note (and paid off a 30-year contract in 5.5 years). In every transaction, we bought what we could afford - not what we actually wanted at that specific time of life.

I understand the desire to live the good life. I also understand the concept of "delayed gratification", living in a LBYM style and retiring early.

Sorry - but those that sacrifice their tomorrows for today deserve little sympathy, IMHO...

I remember one of Ghandi's sayings, read many years ago, which had a great influence on my life, and the decisions I made along the way - "Do not pray for what you desire, rather pray to lose the desire".

 

[Lisa99]

There are some of us who take advantage of 3% down (via FHA) to leave what would have been the downpayment invested in the market. The very low interest rates made the decision make sense.

 

[rescueme]

There are some of us who take advantage of 3% down (via FHA) to leave what would have been the downpayment invested in the market. The very low interest rates made the decision make sense.

So where is your "commitment" ...

Oh, I'm sorry - you had none (or very little)....

Again, your response signifies your hopes on the "possibities" of market return (the future) rather than to "what is"...

Nope - I can't agree with you (of course, that's only me - which counts for little, in this era of "what's in it for me"?)...

 

[Danmar]

debt free and loving it. I worked in the banking industry and it always amazes me that people think they can be successful personal banks ie borrow low and invest or lend high. Too risky for me in retirement.

 

[growing_older]

I have been wondering about this. People with low money down have been paying PMI all along. Does that mean PMI should have had to pay up with all the short sales and foreclosures. If not, then what is PMI actually insuring against?

 

[Htown Harry]

The article has very few surprises, sadly. Monoline insurers specializing in a certain type of risk and ignoring the macroeconomic and microeconomic factors that changed the risk profile of the policies they were writing.

Hard to find the chicken or egg, though. Like many of the profit-hungry financial entities complicit in the 2004-2008 +/- rush to housing run-up, these guys had the power to say "no" to riskier and riskier business models. They did not, and now the reserves available to pay for lost bets is dwindling fast.

Let 'em go bust.

 

[bubba]

I have been wondering about this. People with low money down have been paying PMI all along. Does that mean PMI should have had to pay up with all the short sales and foreclosures. If not, then what is PMI actually insuring against?

I've been wondering the same thing. Shouldn't PMI insurers pay up when their "customers" walk away from a mortgage?

 

[HpRyder]

Having foreclosed on a house many years ago my understanding of MI is that it insures the bank against loss only after the bank takes possession and successfully, at a free market price, sells the property.

So the bank has to foreclose then at an arms length sale, sell the property. Then the mortgage insurance pays the difference between the original mortgage principal ( which what was insured ) and the sale price, not including transaction costs.

IMO, until more REOs are sold, the insurance co. will not be stressed.

 

[Amethyst]

In the minds of some people, getting hold of shiny material things, even for a little while, is better than a life spent with their faces pressed up against the toy store window. They probably think the rest of us are a bunch of boring grinds.

Amethyst

Sorry - but those that sacrifice their tomorrows for today deserve little sympathy, IMHO...

 

[Independent]

At the risk of being censured (again), I'll just make this simple statement, based on my belief.

If you can't afford 20% down payment (e.g. "buy in") you are trying to buy property you really can't afford.

PMI is nothing more than "insurance on losers", or those that want to live today, on tomorrows "possibilities" (e.g. higher income, higher property value, etc. in the future.)

OK, I/DW are prejudiced. We've purchased four homes, over 40+ years of marriage and never had less than 20% down in each case. In fact, our current (retirement) home had over 50% down when we signed the note (and paid off a 30-year contract in 5.5 years). In every transaction, we bought what we could afford - not what we actually wanted at that specific time of life.

I understand the desire to live the good life. I also understand the concept of "delayed gratification", living in a LBYM style and retiring early.

Sorry - but those that sacrifice their tomorrows for today deserve little sympathy, IMHO...

I remember one of Ghandi's sayings, read many years ago, which had a great influence on my life, and the decisions I made along the way - "Do not pray for what you desire, rather pray to lose the desire".

I'd think that most Americans who bought four houses in 40 years managed to have 20% down payments for three of them. The challenge was the first one.

 

[sheehs1]

OK, I/DW are prejudiced. We've purchased four homes, over 40+ years of marriage and never had less than 20% down in each case. In fact, our current (retirement) home had over 50% down when we signed the note (and paid off a 30-year contract in 5.5 years). In every transaction, we bought what we could afford - not what we actually wanted at that specific time of life.

I understand the desire to live the good life. I also understand the concept of "delayed gratification", living in a LBYM style and retiring early.

Sorry - but those that sacrifice their tomorrows for today deserve little sympathy, IMHO...

I remember one of Ghandi's sayings, read many years ago, which had a great influence on my life, and the decisions I made along the way - "Do not pray for what you desire, rather pray to lose the desire".

IF....I buy the 2nd home (which is still up in the air and the first one is virtually paid off) this is what I will be doing. Putting 40% to 50% down...with a plan to pay it off in 6 to 8 years. I am not at all comfortable with debt....even mortgage debt. The banks get rich off the interest. Some people are comfortable with it. The future is so unpredictable and I want predictable and recognize that about myself.

 

[chinaco]

I have not researched this closely... but here are some posts on how PMI can impact a short sale.


PMI & Short Sales....A Deadly Combination!


Guide to the Effect of Mortgage Insurance on Short Sales : MortgageTown

 

[clifp]

I'd think that most Americans who bought four houses in 40 years managed to have 20% down payments for three of them. The challenge was the first one.

That certainly would be true of me and many of my friends. Although in hindsight this probably wasn't good public policy to encourage young people with limited funds to pay houses with little money down.

 

[clifp]

Barrons Article about the PMI Industry.



The Next Mortgage Bombshell - Barrons.com


MBS, PMI, Shortsales, Foreclosures.... what a complicated mess. No wonder it will take years to clear the mess up.... untangling who owns what and who owes what looks like a nightmare.

Excellent article. I'll make prediction that there is a good chance that the next insurance victim of this crisis will be title insurance companies. (The first victim was the muni bond insurers like MBIA who also got into the credit default swap insurance business.)

During escrow in my recent rental purchase in Vegas, I started checking into the Title insurance companies. I owned stock in the number #2 First American (FAF) for many years, I was surprised see that it's credit rating a slipped from AA to A- by agencies like S&P and Moody's in the past few years. The #1 title company Fidelity National Financial FNF is rated BBB- by a Fitch and typically BBB by other rating agencies. This is one notch above junk status. The reason the credit ratings have slipped is because the volume of real estate transaction has falling, hurting profits. FNF for instance just this year slashed its dividend a second time in 3 years.

However, what I don't think people are paying attention is the possible impact of robo signing, and other misdeeds by banks executing foreclosures on title insurance companies. The $1,000 or so the seller has to pay for title insurance, mostly goes to paying somebody to search the property records at the county recorders office. This used to be a labor intensive task, but of course now days is just a fancy "Google" like search.
The title insurance reserve a small amount of money in case something goes wrong, example a con man signed over a property he didn't own. In the case the title company pays your legal fees and potentially refunds your purchase price.

So what happens if you buy foreclosed house that bank didn't have the legal right to foreclose on to due fraudulent paper work? I am pretty sure that title company would have to be involved. My SWAG (scientific wild ass guess) is that if 1% or so of the foreclosures turn out to be fraudulent/illegal that will risk bankrupting the title insurance companies.
Unfortunately none of the major title companies have great credit ratings, but I'd stay away from FNG and check the financials/credit rating of the title insurance companies before buying a house that has been through foreclosure.

 

[DJRR]

I have been wondering about this. People with low money down have been paying PMI all along. Does that mean PMI should have had to pay up with all the short sales and foreclosures. If not, then what is PMI actually insuring against?

That was the beauty of the crisis Get a no money down loan by going 80/20 and avoid the PMI. Why pay that pesky cost anyway

20% down is an arbitrary number that cuts most people out of the market. Crisis was not caused by low downpayments, but by buying too much house for the income. It would be far more effective to go back to the old FNMA debt guidelines of 28/36 of gross income.

I bought my first house for 3% down and the PITI payment was $200 a month less than my rent, and tax deductible. Never had a problem making the payments even though I went through job loss, medical expenses, etc.

 

[Texas Proud]

I have been wondering about this. People with low money down have been paying PMI all along. Does that mean PMI should have had to pay up with all the short sales and foreclosures. If not, then what is PMI actually insuring against?

The answer is yes... PMI should pay... but, they do not pay the whole amount... when I was dealing with mortgages, they only the first 20% of the sales price... so if the house sold for $100,000, they would pay to get the principal down to $80,000... if the homeowner had already gotten it down to $90K, then they only paid $10K....

Not sure what is in the docs today....

 

[clifp]

The answer is yes... PMI should pay... but, they do not pay the whole amount... when I was dealing with mortgages, they only the first 20% of the sales price... so if the house sold for $100,000, they would pay to get the principal down to $80,000... if the homeowner had already gotten it down to $90K, then they only paid $10K....

Not sure what is in the docs today....

I think the PMI provider is responsible for paying the first 20% of the loan amout. Of course now days even if the homeowner had paid off $10,000 on principal on a 100K loan, if the house only sells for $50,000K PMI is still responsible for the other $10K.

 

[Lisa99]

So where is your "commitment" ...

Oh, I'm sorry - you had none (or very little)....

Again, your response signifies your hopes on the "possibities" of market return (the future) rather than to "what is"...

Nope - I can't agree with you (of course, that's only me - which counts for little, in this era of "what's in it for me"?)...

We both still work and save about 60% of our salary even after paying the mortgage and PMI...so we're ok with our strategy. When we retire we'll be selling the house and paying cash for our retirement home (in about 5 years) so will be fully committed at that time.

 

[samclem]

So where is your "commitment" ...

Oh, I'm sorry - you had none (or very little)....

Again, your response signifies your hopes on the "possibities" of market return (the future) rather than to "what is"...

Nope - I can't agree with you (of course, that's only me - which counts for little, in this era of "what's in it for me"?)...

It's definitely right to criticize the rules if you disagree with them, but why criticize someone taking advantage of those rules? The FHA (or VA/FNMA, etc) has been encouraged to run programs which allow people to buy homes with little capital of their own. It think that's wrong, but if a person chooses to take advantage of the idiocy (esp knowing he/she will be paying for these wasteful government programs for the rest of their life due to higher taxes), I say take full advantage. It's not like FHA is going to guarantee fewer loans if Lisa99 doesn't take the free money, and she's at least in a position to make the loan good if there's a drop in home price (whether she should or not is another issue).

 

[Gumby]

The $1,000 or so the seller has to pay for title insurance, mostly goes to paying somebody to search the property records at the county recorders office.

A good post. Only one quibble. The majority of the money designated as "title insurance" in a closing is actually a premium to the closing attorney. The title insurance company keeps very little to insure against defects in the title (which actually strengthens your point).

 

[clifp]

A good post. Only one quibble. The majority of the money designated as "title insurance" in a closing is actually a premium to the closing attorney. The title insurance company keeps very little to insure against defects in the title (which actually strengthens your point).

Is that also true for states where attorney don't get involved in real estate transactions? Or does the issuance of a title insurance always involve an attorney.

Interestingly enough I just got my title insurance in the mail today. They sure make a lot of promises about things they will protect me from. Hopefully I'll never have to see if they actually do.

 

[Gumby]

Is that also true for states where attorney don't get involved in real estate transactions?

I don't know, but I'm going to see if I can find out.

 

[chinaco]

A good post. Only one quibble. The majority of the money designated as "title insurance" in a closing is actually a premium to the closing attorney. The title insurance company keeps very little to insure against defects in the title (which actually strengthens your point).

Wow... this discussion brings up an important aspect of buying a home that no one (or very few) ever consider.... Solvency and Financial Strength of the Title Insurance Company.


Financial Stability Ratings® Title Insurance Companies

Since Title Insurance protect the Bank (unless one has an owner's policy).... hopefully banks are careful selecting their title insurance company.


But how many owners have done a due diligence check-up on their Title Insurance Company or purchased an Owner's Policy?

My guess is only people who hired a real estate attorney or did a lot of research.

We bought an Owner's Policy when we purchased our house. I relied on my attorney. He counseled us to buy an owners policy.



Title insurance in the United States - Wikipedia, the free encyclopedia


To complicate matters, it seems many title insurance companies use reinsurers.

Does anyone know if Title Insurance is backed by states if they fail (like other insurance policies)?

 

[Texas Proud]

Is that also true for states where attorney don't get involved in real estate transactions? Or does the issuance of a title insurance always involve an attorney.

Interestingly enough I just got my title insurance in the mail today. They sure make a lot of promises about things they will protect me from. Hopefully I'll never have to see if they actually do.

Just as an FYI....

A few months after closing on our house... we get a letter from an attorney saying that the taxes for the utility or water district had not been paid... blah, blah, blah and they were going to forclose on our house if they did not get money by such and such a date...

I contacted the title insurance company and they said 'send us that info and we will take care of it'... I did... and never heard anything about it again... SOOO, it seems that it does work.. at least for minor things...