Question Details

Jean Doyle, Real Estate Pro in Morris County, NJ

PMI and short sales and foreclosures

Asked by Jean Doyle, Morris County, NJ Mon Jan 21, 2008

Can anyone clarify this for me. I was told that if a loan included PMI and it was going into foreclosure that the bank would rather have the property go into foreclosure so the can make a claim on the PMI. What role does PMI play on the short sale?

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PMI does not cover the full exposure of the lender. They are covering the top slice (maybe 20% in this case) plus some fees. In the case of a 90% loan, then PMI is usually 10% of loan amount. In order for the Lender not to void their claim for the PMI coverage, several things must happen. The lender must manage the default to its completion, usually foreclosure or a workout or short sale. Any agreement short of foreclosure must be approved by the PMI company.

PMI may want the house back following a foreclosure, in order to attempt to recoup any loss they may have due to a claim. In that instance, they may not approve a short sale.

PMI will often approve a short sale if the market indicates that they have no shot at recouping their loss or claim. Or often, there is some middle ground, whereby the Lender could sell it for 85 to 90% of the original loan amount, thereby reducing any such claim to PMI. Much like any foreclosure and dealing with Loss Mitigation, each case is different... not sure why, maybe it is the Rep you deal with, the latest whim of mgmt based upon their recent losses, et al... Those policies change all the time, so the best thing to do is ask... and see what they say.

If a borrower defaults on his conventional mortgage (goes 90 days late on a payment), the lender files the foreclosure notice and sends in a claim to the insurance company to recover as much as 20% of the mortgage balance. This, in turn, gives the lender a smaller risk when the lender sells the property to recover their losses.

Let's assume we have a $300,000 loan for a property that was purchased last year but now being sold via short sale for as little as $260,000 today.

How much will the lender receive from the insurance company?

$300,000 times .20= $60,000

What price must the lender sell for to not have a loss?

Well, the lender's exposure has been limited to $240,000 now that they received $60,000 from the mortgage insurance company
4 votes Thank Flag Link Tue Jan 22, 2008
From what I know PMI on short sale is good news for possible acceptance since most of the loss will be covered by the insurer.
0 votes Thank Flag Link Fri Apr 3, 2009
They appraise the value of that home so low ,they want to keep it and see what the market will do.I have sold my home 7 times ,it is now 65000 less than the first offer ,no one wants to wait while the bank contacts no one and just keeps appraising it lower and lower,and keeps on getting offers .The are full cash offers!
0 votes Thank Flag Link Fri Apr 3, 2009
I knew there was a question like this before here is the link

http://www.trulia.com/voices/Agent2Agent/PMI_in_this_foreclo…

hope it helps.
0 votes Thank Flag Link Mon Jan 21, 2008
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