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.