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Private Mortgage Insurance - Facts From The Source

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RSS COMMENTS(8) LINK HERE ADD NEWS TO YOUR WEBSITE

Several weeks ago we featured Part One of an article on Private Mortgage Insurance (PMI) and the relatively recent twist called a Piggyback Mortgage which allow a borrower to eliminate PMI. You may have noticed that the follow-up articles have not appeared.

If you were waiting breathlessly (sure you were), our apologies. There was a computer glitch that caused some of the delay, but much of the time went into more research into PMI.

Information on this type of insurance is surprisingly limited. A computer search turns up thousands of results, but very few of the dozens of websites we looked at went beyond explaining when and why PMI is required. We were particularly interested in how PMI rates (premiums) were handled over the life of the loan - whether they declined with the loan balance or if there were periodic increases or decreases that reflected underlying economic factors. The mortgage loan officers to whom we spoke admitted they had long wondered about some of these things themselves but had no clear idea how the process worked.


Finally we contacted AIG United Guaranty, a private mortgage insurer. When we finally reached the correct department (three regional offices, corporate headquarters, and seven very nice people later) my several questions brought them to a dead stop. Apparently no one had ever asked about such things before. However, the public affairs spokeswoman was no quitter and she was able, after some delay, to obtain answers to each of my questions from the corporation's Vice President of Claims. These answers, of course, pertain only to United Guaranty, but other companies probably follow essentially similar rules. Because the answers are complicated and we certainly don't wish to misrepresent United Guarantee, we are quoting them verbatim. Also, this was an email exchange so there may be some duplication among questions and answers.

MortgageNewsDaily: Do new premiums fluctuate over time? If so, are they tied to interest rates and if not, what are the underlying factors?

United Guarantee: Actually, the majority of mortgage insurance premiums stay the same for years one through ten of the loan and then reduce to an annualized rate of .20 basis points (times the loan amount and then divided by 12 for a monthly amount.) Premiums that do not reduce are described in the next answer.

This would be the only fluctuation (reduction) in the mortgage insurance premiums which is not tied to interest rates. The total monthly loan payment itself may change if the loan is an adjustable rate mortgage, but the mortgage insurance premium would remain a constant within that payment. (A financed MI premium would not show up in the monthly mortgage payment as that premium would then become a part of the total amount borrowed.)

AIG United Guaranty and other mortgage insurers have, in recent years, filed additional rates for riskier loans including A-minus loans and loans that feature limited documentation. These new programs - which feature higher premium factors - could lead to the perception that premiums fluctuate, but in most cases, our premiums have remained constant over many years.

One last thought: a refinance resulting in a higher loan balance due to cash out would lead to a higher MI premium if the borrower opts to borrow enough to make MI necessary (less than 20 percent equity in the home.)

MortgageNewsDaily: Once a borrower is covered under a PMI policy, is his premium fixed for the duration of the policy even as the loan balance is declining and even if premiums on new policies increase or decline?

United Guarantee: Yes. The premium is fixed for that particular loan, even if the loan balance declines, but it will drop in year 11 to .20 basis points (see my answer in Question 1 above.) Nearly all of our MI renewals are based on the original loan balance and a not a declining one. For those based on a declining loan balance, there is no reduction in premiums in year 11 as described in my first answer.

We admitted to confusion as to how a payoff on a claim is calculated and it is considerably more nuanced than we had thought, tied to the amount of coverage the lender demands that the borrower pay for. United Guarantee stated:

Our payment (to the lender) is not based on the difference in required versus actual down payment. If a lender specifies, for example, 25 percent "coverage" for the loan, we pay 25 percent of the total amount outstanding on the loan (principal balance plus other costs accumulated when the lender/servicer forecloses, as illustrated below:

Original purchase price:
$150,000
Original loan (10% down - $15,000)
135,000
Principal balance at default
127,600
Accumulated interest
9,800
Attorney's fees
2,000
Property taxes
1,140
Hazard Insurance
800
Property preservation expenses
1,000
Statutory disbursements
1,500
    Subtotal
$143,840
 
Less escrow balances
1,100
 
Total claim
$142,740
   
Coverage on policy is 25 percent  
So claim payment is (25% x $142,740)
$ 35,685

So you see this claim payment is considerably higher than the extra $15,000 required to reach a 20% down payment in the original purchase. We cover more than just that "gap."

In the next article we will take a look at the numbers involved in PMI vs. piggy back mortgages and at some of the claims PMI insurers are making about the risks inherent in choosing their competition.



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Comments (8)

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I have a rental house that was totally ruined,by renters.15,000 dollars worth.I have PMI and am wondering if I default and give it back to the lenders,will the PMI cover for the lender?

Above Posted By: anonymous | Tue, 17 Jun 2008 18:45:33 EST

I've been following a foreclosed house that isn't on the market yet. It's been nearly a year since it was foreclosed. When I call the bank that has title to it , they tell me that it has to be sold through a realtor. Another realtor told me the banks PMI could be holding it back because they don't want to lose money on it and won't pay out? The last owners only paid on it a few months before moving out so everyone loses. It wouldn't surprise me that the last tenant/owner is being prosecuted for fraud since he also bought another house that same year?

Above Posted By: Joan | Sun, 4 May 2008 09:59:15 EST

Since this is an insurance policy can the lendee make a claim if he/she falls behind? I have as well searched and searched and nothing. Correct me if I am wrong but it really defends the lender not help the buyer. It will have to go to complete default for it to "slightly" benefit the buyer, and fully benefit the lendor. HUD, FHA, VA should develop some policy to make a claim on the ins. we are paying month in, month out. Otherwise if no default then the money you paid for 5-8 years is gone!

Above Posted By: Secret! | Sun, 7 Oct 2007 09:39:21 EST

Has anyone heard that PMI is now tax deductible? Wanted to find out if this is rumor or wrong information and not facts. Thank you.

Above Posted By: Brad | Mon, 26 Feb 2007 15:19:12 EST

Katrina, your original loan paperwork should have a disclosure that stipulates exactly when you can have the PMI removed. Be aware that the 25% that they require generally is not allowed to occur within the first 5 years of the mortgage unless there has been a capital improvement to the property. (adding a pool or such).

Above Posted By: Pat Flynn | Wed, 14 Feb 2007 09:55:32 EST

I keep reading about some rule or law that PMI is automatically cancelled after 78% . . . But we wrote to our mortgage company and they are requiring that we now pay down 25% (and of course we have to pay the 3-400 for an appraisal). Can the bank change the requirement from 20 to 25%? Thanks

Above Posted By: Katrina | Wed, 26 Jul 2006 08:02:18 EST

BUT, getting them to actually PAY a claim is much more difficult than you can imagine.

The MOTTO of the Claims Department is: RESIST PAYMENT AT ALL COSTS

Above Posted By: Secret! | Tue, 13 Sep 2005 16:47:11 EST

Can lenders sell the property after the pmi claim has been paid?

Above Posted By: Anonymous | Thu, 8 Sep 2005 23:58:33 EST


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