Can anyone help explain why mortgage insurance failed our US financial system?

[Bill Cobb]

With the "mortgage insurance component" in place, costing mortgage payers billions each month in premiums until they reach 20 to 25% equity in their homes, why is the US in this mess?

When Joe Homeowner goes down and closes on a new home loan (Conventional, Option ARM, etc..), he has a "mortgage insurance" component within that loan. As the general public understands it, in the case of loan default, the mortgage insurance is supposed to pay the lender or the entity that purchased the loan for the lose of the loan - for the loss of that income stream to the investor. I may be missing something here, but wasn't "mortgage insurance", which borrowers pay monthly premiums of about $125/month to $200/month extra on their mortgage payment, supposed to avoid the kind of situation we find ourselves in today in the US? If mortgage insurance was acting in the capacity we are led to believe it should, with American home loan holders paying billions of dollars each month in premiums as a requirement, then why is there a single instance of financial turmoil in the money markets? As the media and the Federal gov. put it, "subprime loans are clogging the money pipeline"! If mortgage insurance was in place and actually paying out for losses incurred, then no loans should be clogging any money pipeline. AND, then no bank should have a "non-performing asset" on their books. If the bank is paid by the mortgage insurance industry for this "non-performing asset" and/or loss, then why is any of this such a big deal? Yes, I understand that it's going to cost the holder of the actual home itself after default between $10K to $30K to dispose of that home. But that cost must be off-set by the fact that mortgage insurance is making up some of that loss. Can you help us out here to understand the above and why we have the problems we have in the US today?

Were these loans so exotic (so risky) that the imbosils offering these loan programs didn't require PMI (mortgage insurance)? If so, who did these imbosils expect would bail them and these borrowers out? I just can't fathom in my mind a home purchase loan program where PMI wasn't a requirement, why our Banks would have allowed such irresponsible lending practices (for their own protection or for the "funder's protection", not just the borrowers) and why these loans were allowed to be packaged as AAA rated mortgaged back securities and sold to Countries like Austria.

Perhaps I have a wrong understanding of mortgage insurance and am showing my ignorance. But, if I do, where are the billions in mortgage insurance premiums paid monthly going and for what purpose?

Thank you for your time!

[Brian Davis]

PREFACE: “I’m no expert on this issue”!!

That said . . . It’s my understanding that these problem loans did NOT have PMI. The greedy lenders looked at the PMI issue and said . . .

”Hey, why should we pay someone ELSE to insure this loan just because it doesn’t have an 80% LTV. Why don’t we just have a SECOND NOTE to make up the difference so that we don’t need PMI?? Win Win! The borrower doesn’t pay PMI and WE (lender) make even MORE MONEY!!”

In essence loan officers would often write a first and a second loan on the same purchase. Neither loan individually triggered the PMI insurance thus saving their customers from having to pay PMI insurance. Instead we get to pay it 700 Billion worth!

I think the loans that you and I have are NOT the problem! We have “skin in the game” (equity). It’s these folks with nothing to loose that just walk away.

Brian J. Davis, RAA - Brian Davis & Associates - Brian has over 24 years of appraisal experience in Central, IL and hosts the Appraisal Scoop blog and the Win TOTAL Users Group an email forum for appraisers

[Bill Cobb]

Here's 1 Reply I received:

Hi Bill,

If these banks circumvented the PMI requirements to increase their own profits, the managers should be jailed for fraud and the banks allowed to fail. I feel like the $700 billion was just a down payment of what they will eventually take and that our country has taken a huge step in the direction of socialism. Welcome to the new world!

Al

[Bill Cobb]

Here's another reply:

In my opinion it’s not that the money is not there for the insurance companies it’s that the white collar criminal executives steal it in bonuses and $440,000 trips like the one AIG took LAST WEEK AFTER THE BAIL OUT!

That, to me, is beyond words! They shouldn’t be only fired they should go straight to hard labor in the state penitently for the rest of their lives!

And you and I both know it’s not only the insurance companies that are doing these kinds of criminal activities, all of politicians, mortgage company executives, banks, medical industry, and of course the oil industry all of which get their money from you and I! As my dad used to say it’s enough to piss off the pope!

People in this country are trying to figure out how they are going to eat and buy gas to go and look for a job and these people are still stealing for their pleasure!

Anon....

[Carolyn Tu]

Bill I know many loans here in California were made as 80/20's. 80% down on the first and 20% equity line. Sometimes there was a lender paid MI built into the equity line but often not. These loans were sold to consumers as a way to get into the property with very little money down and a way to "avoid" mortgage insurance.

[Bill Cobb]

Thank you so much! According to Brian's Post/Answer above, that's why we're in this mess. Bill

[Cynthia]

It's not as easy as one issue that got us into this mess. There is so much blame that can be spread around it's hard to find someone that isn't part of the issue. What is the old saying "all it takes is for good people to do nothing?" or something like that. Didn't "we" all know this couldn't last? Didn't we realize the inflated home values could not maintain? One person can make a difference and we need to. "We" need to coexist better with our fellow appraisers so that we have a body that can be heard and not such an "independent" group that we have no voice. Who's to "blame?" the newspapers for their scare tactics that sell papers and the folks who buy them, banks and mortgage companies for making the loans (under pressure cause someone else will if they don't we often heard), appraisers that were willing to stretch the envelope and look the other way at times, legislators that did nothing or worse, Wall Street for being so creative at their thieving ways and us for allowing it, everyday folks that did not educate themselves or get involved and took the stance "it does not effect me, I am not involved", heck if I think long and hard enough I guess I could find a reason my dog played a part in all this. But fingerpointing won't do us any good. I believe we need to look forward, be positive and refuse to participate in the fear tactics, negitivisims we see so prevalent. We are going to find a new equilibrium (ok spelling isn't my strongest point) and even if we end up living in tents we are still in a great country with much prosperity compared to so many and we have so much to be greatful for. Food is plenty (hey most of us way over eat) we are not standing in line for watery gruel nor are we in terror of being shot on our streets (most of the time). Lets start a gratitude, positive movement and pass it on!

[Bill Cobb]

Thank you so much for your time! My question wasn't about blame. It was about how do we prevent this from happening in the future. Brian's answer to what happened was most revealing to how the US Taxpayer was left holding the bag. I think it's very clear that the mortgage industry shouldn't be allowed to avoid PMI in future home loans. If rules aren't setup to say no to no PMI deals, then we'll be in this mess again in a few years, if that long. I most certainly believe we'll be bailing out FHA in the next 5 to 8 years for sure! Bill

[George D Sheets]

But FHA thinks they have a way to control the problem by managing the appraiser. Make requirements tougher, restrict who can do their work. However, they forget that they have lowered the property standards for a home to meet guidelines so that almost any home qualifies and they have increased the lending ratio and the loan amount so that they can make more and more loans. Do you really think it will take 5 to 8 years? I think it will be sooner unless they wake up and take corrective action. Yes it is the American Dream to own a home but there must be a safety net and right now they are working without one. Maybe they need to reinstate some of the old guidelines, minimum property standards so the property might be worth what it is said to be. George Sheets

[Bill Cobb]

Thank you, George! If FHA thinks the way to control this problem is by managing the appraiser, then why have they opened the flood-gates to new FHA appraisers that don't have ANY FHA TRAINING AT ALL. Remember back in 1999 when we had to go through those 3 full days of FHA training and then pass the FHA Test? We had to know our trade and if not, you were kicked off the list because FHA was spending millions each year to review our work. Now, FHA open the flood gates and recruits all of these new appraiser that don't know "diddly-squat" about FHA appraising. I've read recently that FHA roster list is now up to 57,000 appraisers. This is a complete joke. George, you're exactly correct, it won't take 5 to 8 years for FHA to implode....it'll be sooner. The minimum property standards now are so low, why even have the MPS. Thank you so much! Bill

[Kenneth J. Miller]

For the same reason some insurance companies fail after a major disaster hits a state. The insurance companies can handle claims in small amounts but when you have thousands of claims flooding in at one time it is more than they can handle. Plus PMI only covers a portion of the loan for a bank so if a bank loses more than what the insurance covered the loan for then the bank loses that money. This all could have been avoided if people used common sense and didn't let greed blind them.