Posted on 09/20/2008 7:21:25 AM PDT by Liberty Ship
What happened to PMI, or Lenders Mortgage Insurance, in this discussion? Technically, people were supposed to purchase PMI to protect the lender in the event of default. This was a requirement when the borrower did not put down at least 20% cash upon purchase. 20% was considered to be a sufficient amount to assure that the lender did not take a loss in the event of foreclosure.
From Wikipedia:
"Lenders Mortgage Insurance (LMI), also known as Private mortgage insurance (PMI) in the US, is insurance payable to a lender or trustee for a pool of securities that may be required when taking out a mortgage loan. It is insurance to offset losses in the case where a mortgagor is not able to repay the loan and the lender is not able to recover its costs after foreclosure and sale of the mortgaged property.[1] Typical rates are $55/mo. per $100,000 financed[2], or as high as $1,500/yr. for a typical $200,000 loan[3]."
But a practice developed that I consider to have been fraud. The lender and the bank basically colluded to avoid PMI by allowing the borrower to get a second "piggy back" loan for the 20% down payment needed to avoid PMI. Thus, people were 100% (or more) financed and there was no PMI to protect the lender in the event of default. A default far more likely in the case of a 100% financed buyer than in the case of one who had been able to accumulate 20% down.
This drove more and more unqualified people into the market and inflated the prices of homes artificially since the market was flooded with unqualified home owners. The effect on the values was amplified in that similarly unqualified people were buying in the very high end of the market; often buying multiple homes!
Add to this the fact that the line between consumer lending and mortgage lending was blurred with the advent of the "home equity loan" that developed because of the asinine new tax policy that allowed the deduction of home loan interest only, and the stage was set for disaster. Compound that with the fact that the government was pressuring lenders to put anyone in a "home" who showed up, and you have our present crisis.
I blame both the lenders AND the borrowers, conspiring to avoid PMI, for the fact that the government is now having to step in. Otherwise, as I see it, PMI would have served as the safety net it was designed to be.
Whoever took that out of the system is the beginning of the chain of collapse.
I believe this was only available as a refinance, but I could be incorrect.
I think you are wrong. My friend told me he received 2 mortgages 80/20. It figures, he is in foreclosure
The problem is Fannie and Freddie knew all this was going on and turned a blind eye.
The PMI requirement is to protect the 1st mortgage, which would be packaged for Fannie Mae or Freddie Mac. With the 80 -20 situation, the 1st mortgage was for 80% LTV and has 1st lien position so it was covered with 20% equity, just like PMI.
The 1st lien holder come first in a default, 2nd lien holder is last.
It is the holder of the 2nd mortgage who is at risk. They evaluated the risk and charged a higher rate for that risk. In hindsight it was not a good risk in many areas.
But the soundness of the 1st mortgage was there, as they did have 20% equity at time of closing.
Not refinance only.
I advised a young couple, purchasing their first home,to avoid this 80 percent first 20 percent second mtg scenario. (the 20 percent second was at a very high rate of interest). They were obviously biting off more than they could chew. I was told to “butt out, the mortgage guy is a good friend of ours.” I tried.
You raise a good point about PMI. I believe there was political pressure to remove PMI. I do not understand why a lender would want to remove PMI. Rational lenders understand the real risk of default and the value of PMI.
The basic problem for the entire mess was the corrupting influence of the political process on the mortgage industry. Without the influence of the political process, lenders would have been rational resulting in a much smaller problem. Mortgages have become a poltical football.
The big question now is the future of mortgage lending. Will the political influence on the industry decline? I do not see the Democrats permitting political influence to decline. Democrats will scream for even more political influence. I also believe the rats will try to make mortgages another entitlement. The rats have done this with student loans. The rats have lowered interest on student loans to almost nothing. In addition, the rats have increased allowances for student loan defaults. There will be a huge scandal of student loan defaults in a few years. For mortgages, I see the rats insisting that subsidies be provided for their favored groups. The rats may even institute new fees and taxes to subsidize mortgages for their favored groups.
Did AIG offer such insurance?
Of course, it’s either Bush’s fault or his lender’s that he didn’t make his payments.
I know and I told this buffoon to stay in his apt
PMI started to fade from the scene as Wall Street decided to take home mortgages and chop them up into different tranches. They sold the concept that holders of each tranche was insulated from serious risk of default because they only held an undecipherable piece of ownership. So buyers of these mortgage derivatives felt safe in their investment vehicles structure rather than examining what they really owned. As the concept of risk left the scene, people decided they didn’t need PMI as much.
As long as the actual lender and the actual borrower were split apart from a true relationship with each other by 1,000 degrees of separation, no one could then determine whether a good loan was being made on the front end. In the meantime everyone in the chain made “money” but had no clue what was going on throughout the chain.
It isn’t a perfect analogy, but there were elements of a Ponzi scheme here in housing. As long as prices kept rising and you could create new suckers and new funding to buy the houses, the system worked. Once that stopped, it crashed exponentially and quickly.
That being said, I wouldn't be surprised if there start to be laws or mortgage terms that require a minimum down payment and prohibit further mortgages beyond that amount. If you need 10% down, I expect that you won't be allowed to tap that 10% with a home equity loan.
What we will see when this whole debacle plays out is the end of employment with “commissions”. Most all jobs in the financial/real estate sectors will be salaried with maybe a year end/quarterly bonus. People mostly working on “commision” have ruined these industries.
I've been a good boy on the payments; the 10% second lien is just about paid off.
Yeah. Our second home that we shouldn’t have been able to afford, we financed 100% through 80/20. I couldn’t believe it. Dream house at 30. I knew then that something was terribly, terribly wrong with banking. 80/20 on interest only loan. Can you imagine?! Thankfully, we sold that dog RIGHT before the real estate crash in Florida and bugged out to Texas for a proper mortgage, 30% down, with our profits. My friends in that FL neighborhood are all going under. Something like 70% of the houses are for sale. The poor fool that bought my house has it listed $80,000 less than he bought it from me and can’t move it. It’s epidemic, not just in the Fannie Mae deadbeat crowd, but the young and dumb working class — interest only changes to an ARM after 3-5 years and interest goes from 5.65% to 11.5%. People try to hack it out, make their payment until they can sell it — which they can’t sell. They start being late on credit card payments, trying to keep up with higher mortgage payments. Credit gets ruined and they cannot refinance to a fixed rate because of new bad credit. They file bankruptcy. It’s ugly, ugly, ugly. The government can’t bail everyone out. Someone has to eat it.
I believe this was only available as a refinance, but I could be incorrect.
True, then just a few short months down the road they were rolled back together with a bogus appraisal and a 120% loan was given.
But, EVERYONE DESERVES, EVERYONE IS ENTITLED TO, any little thing their heart desires, whether they speak English, work, walk upright, or whatever. ‘Cause we’re the ‘good people’.
The government has put so many entitlement programs into place, now, people demand that government “give” them what they want.
You raise a good point about PMI. I believe there was political pressure to remove PMI. I do not understand why a lender would want to remove PMI.
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