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Guide to the Effect of Mortgage Insurance on Short Sales

Posted at MortgageTown by Brian Brady
Jan. 15, 2008

PMI is known as the acronym for private mortgage insurance.  Private Mortgage Insurance is used when a borrower has less than 20% for a down payment. Private mortgage insurance protects mortgage lenders against potential losses in the event of borrower default.  The insurance company, collects a monthly premium from the borrower (based on risk analysis) and agrees to pay the lender a certain amount of money if the loan defaults (usually 17-25% of the loan amount).  It's model was based on FHA loans and their mortgage insurance premium (called MIP, probably to confuse you).  FHA and VA offer guarantees to the lender equal to as much as 25% of the mortgage balance.

If a borrower defaults on his conventional mortgage (goes 90 days late on a payment), the lender files the state-specific 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 for $317,000.  Could that property have dropped in value since October of 2005 ?  Well, if it was a condo in my hometown, San Diego, it may be selling for as little as $260,000 today. Assume it costs about 8% to sell the property.   You, the Realtor, should know two things:

How much will the lender receive from the insurance company if the borrower defaults? 

$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.  We take $240,000 divided by 92% (remember that it costs 8% to sell so the 92% represents the net proceeds).       $240,000/.92= $260,900.

Why is this so important to you, the professional Realtor?  When negotiating an offer for a property that would result in a short payoff to a lender, you need to remember this fact:  PMI claims will mitigate some of that loss.  If you know that a seller has PMI on their mortgage, you have that much more wiggle room when negotiating a short sale with the lender.  Lenders have been known to attack Realtors' commissions as much as 50% when a short sale exists.

Knowing your numbers and how PMI affects a lender will help you defend your commission. If you understand the net effect the sale will have on a lender, your short sales will go much more smoothly.

N.B.- This post is an excellent starting point but gets better as the reader scrolls through the comments.  I was fortunate enough to draw the attention of my friend  Bill Archambault , long-time lender and Realtor.  He clarifies a few fine points and offers an opinion about negotiating short sales.

COMMENTS FROM THE ORIGINAL POST, WRITTEN IN NOVEMBER, 2006, CAN BE FOUND HERE

User Comments

1. RE: Guide to the Effect of Mortgage Insurance on Short Sales

Written by: Georgette Uyhazy
Apr. 29, 2008

Hi

I'm not a real estate agent, but I did just sell a house on a short sale with PMI insurance. The PMI insurance company has insisted that we pay back  $23,000 to them. It is through AGI or United Gauranty. Our mortage company ( citi mortage ) insisted we had to sign the agreement or we could not make the sale. Has anyone ever heard of this. If they only pay back a certain amount then why are they requiring us to pay back almost 50 % of the lost amount.

If anyone has any insight or suggestions I would appreciate the advice, thanks 

2. RE: Guide to the Effect of Mortgage Insurance on Short Sales

Written by: Philip Meza
Sep. 22, 2008

Does  this mean that P.M.I companies are trying to short cut realtors of their commission?

P.S., your article was brought into a college level classroom and was the topic of debate for that particular session. Thanks again, and a response would be greatly appreciated.

Thank you again,

Philip Meza.

951 901 7431 

4. RE: Guide to the Effect of Mortgage Insurance on Short Sales

Written by: Nancy
Dec. 8, 2008

I am currently having the same problem as the first poster. With the same company, AIG United Guaranty! I was qualified to do a short sell thru my bank (US Bank). A buyer was found and approved thru US Bank. At the last minute I received a call from my realtor saying that in order to sell the house I needed to sign a Promissory note to AIG for $25,000!  I said I was not going to sign anything like that. AIG said unless I agreed to this they would start foreclosure proceedings. Which they have done. This could have been avoided if I had been able to sell the house. Now my credit is going to be ruined. I don't see how AIG has so much power over a bank as to prevent the sell of a house to an already approved buyer.  It's as if they are holding my house for ransom. And the fact that there was a buyer - this makes no sense.

5. RE: Guide to the Effect of Mortgage Insurance on Short Sales

Written by: mara
Dec. 9, 2008

I am in the same boat.  I am trying to short sale my investment property.  The mortgage insurance company said they would pay it & not send me a 1099.  Is this really true.  Please ANYONE, advise on questions I need to ask before I settle. 

6. RE: Guide to the Effect of Mortgage Insurance on Short Sales

Written by: Teresa
Feb. 3, 2009

I will try to explain both posts - being asked to sign what I am assuming is a promissory note.

The PMI company has to approve any short sale, because their insurance policy only officially kicks in in the event of a foreclosure loss.  A "short sale" is voluntary on the part of the lender and not a requirement for reimbursement from the insurance company in the event of a loss. I have even had short sales declined because the lenders would fare better in foreclosure than with the short sale because of the way their policy was written.

Basically the PMI company and approve (or not) the offer, which will obviously result in a claim against them from the lender for their loss.  Because of this they have the power, and the right, to require whatever they want to from the seller in terms of repayment.  Remember that allowing the short sale in lieu of the foreclosure is completely VOLUNTARY on their part.

I don't like this either..it's just the way it is and we see it every day.

 

 

7. RE: Guide to the Effect of Mortgage Insurance on Short Sales

Written by: Sandra Esfahani
Apr. 7, 2009

I am representing the sellers on a short sale and looks like everything was in order and was asked for a revised HUD - no explanation.  So I furnished this to Citimortgage yesterday, then called the negotiator today who informed me that it has been sent to MI.  I aksed how long this might take and what they might ask for. 

She proceeded to not answer the questions except with "have no idea, each deal is different".  I have never dealt with the MI situation, so would like to know what I might expect.  Buyers are ready to close and getting restless.  Are we so close, yet so far?

 

8. RE: Guide to the Effect of Mortgage Insurance on Short Sales

Written by: Nicole
Apr. 11, 2009

I am a buyer currently pursuing a short sale home in the Sacramento area. We heard late last week that the owner did have mortgage insurance, and now that company is requesting that the sellers pay $50,000 before they approve the short sale. I'm trying to understand all of this, and this Web site has definitely been helpful.

That said, the seller clearly does not have $50,000 (hello, they're defaulting on their home!), so I was curious if it would help if we added some money to our offer to sweeten the deal for the MI company. Can someone advise on this? We really don't want to lose this house, and it seems it will go that way if the MI company forces foreclosre...

Also, it seems to me that the MI company is going to have to shell out the money once the home is in foreclosure anyway, right? So is holding off on doing so just a stall tactic for the MI company?

9. RE: Guide to the Effect of Mortgage Insurance on Short Sales

Written by: DZ
May. 5, 2009

I'm currently in the same situation...The MI company asked for 25, 000 and we finally settled on $10,000.  I have been told that they have the power to do this in a short sale process......I too wonder if I'm doing the right thing by paying it and not getting played a fool....

10. RE: Guide to the Effect of Mortgage Insurance on Short Sales

Written by: Gwen Henderson
Aug. 3, 2009

I just completed a short sale. The PMI company required me to sign a $5,000 Promissory note to close the deal. Now the PMI company has sold the debt to a someone else (Dyck O'Neal Recovery Company).....I am wondering since the original creditor (Genworth Mortgage Ins.) was paid when they sold the debt if i am obligated to pay the not back and if they have a right to repot to the credit bureau if I do not pay.

11. RE: Guide to the Effect of Mortgage Insurance on Short Sales

Written by: Linda Ciccone
Aug. 6, 2009

I have the same problem as everyone else!  I am in the process of a short sale and the MI company is demanding $50,000.00 from us to finalize this deal.   Am I better off refusing to pay and go to foreclosure?  I am fearful because  I do own another home and have 401K money.  If I foreclose is my life savings in jeopody?  My attorney advised me to go through with the short sale and then not pay the $50,000.00 loan.  What do I do????

12. RE: Guide to the Effect of Mortgage Insurance on Short Sales

Written by: cheryl
Aug. 8, 2009

The plot is pretty thick.

It seems to me the MI companies are trying their best to mitigate their own losses and see if they can get money from the sellers to help pay their insurance claims to the shorted lenders.  It also seems that they are trying to extort money from the sellers by holding the short sale hostage.

If they have to pay the claim once the a lender has foreclosed, what difference does it really make to them - they will have to pay the lenders claim with a short sale or with the foreclosure.

It also seems pretty sneaky on the MI companies part, to allow buyers to help pay their bills. 

Maybe I shouldn't pay my phone company unless they help me pay my electric bill.....

Am I missing something or is this correct?

13. RE: Guide to the Effect of Mortgage Insurance on Short Sales

Written by: Emily S. Knell
Oct. 3, 2009

You are AWESOME Brian Brady!

I had put in this long keyword search into Google & up popped just the exact answer & MATH I was looking for!

Thank you so much for the great information!

14. RE: Guide to the Effect of Mortgage Insurance on Short Sales

Written by: Frank
Nov. 25, 2009

What ever happened with your short sale.  Did you pay the PMI company.  I am in a similar situation.

15. RE: Guide to the Effect of Mortgage Insurance on Short Sales

Written by: Misti
Dec. 4, 2009

I am going through the same thing right now. I was asked to sign either a promissory note of 30k for over 5 years or pay a lump sum of 10k. I am currently negotiating, or trying to rather negotiate the10k down a bit. I am seeing that I might be faring better than many of you out there. Good luck to all! It's so frustrating because honestly, the mortgage balance is the way it is because of the type of loan it is, not because people are so busy trying not to pay their mortgage. The mortgage co. spent so much time getting so much interest and profit off of us all and now their insurance companies want more $$ to sure their business up? NOT FAIR!!

16. RE: Guide to the Effect of Mortgage Insurance on Short Sales

Written by: Laurie
Jan. 28, 2010

I represent the seller and we are facing the same problem.  The seller owes $550,000 and we got the ok from Wells Fargo to list it for $460,000.  We received a good offer but the MI company came back and wants the seller to sign a $50,000 promissory note over 5 years at $415 month or pay a lump sum of $25,000.

Obviously, they have no money...duh!  Has anyone  been able to have the buyer get a separate loan to pay the seller's promissory note?  I asked Wells Fargo if the buyer could just up their offer $50,000 and they said that it had to be paid to the MI company so that wouldn't work. HELP!

17. RE: Guide to the Effect of Mortgage Insurance on Short Sales

Written by: JT
Apr. 2, 2010

I have a question.  I am involved with a short sales as we speak.  I'm the buyer.  I just heard back from my agent that the house has a mortage insurance on it.  We checked with the owner and they said they put 20% down, so there shouldn't be any MI.  The servicers of the loan is onewest bank, but it's own by an investor.  Can the investor buys MI onto of the loan on their own?  thanks,

18. RE: Guide to the Effect of Mortgage Insurance on Short Sales

Written by: dawn
Jun. 29, 2010

I have a question.  we have found out that the short sale house we are trying to purchase has morgage insurance coverage.  We are at the stage after almost 5 months of waiting, and were told we would hear back from the negotiator within 30 days of the PMI receiving our offer.  It has been about 45 days and when I last checked, we were told the negotiator , advised not to try and push for an answer because they tend to bring back harsher demands on the sellers.  Although I am certainly not wanting the harsher demands for the sellers,  I would like to get am answer.  Our life is in limbo, and is there any thing we can do to get an answer?  I know we are the only offer that has been given on the house. Thankyou for any advice 

19. RE: Guide to the Effect of Mortgage Insurance on Short Sales

Written by: gary
Aug. 11, 2010

I am wondering if anyone out there has had an attorney advise them about the legality of the PMI demands in any of these cases?  

Perhaps someone in Congress needs to address this matter.  Any ideas on who in Congress is/are active in this area of home mortgages/shortsales/foreclosures?

20. RE: Guide to the Effect of Mortgage Insurance on Short Sales

Written by: Trini
Sep. 30, 2010

Seems to me that this is extortion. PMI companies are in the business of risk and should take their medicine like the rest of us. Isn't this the very nature of insurance? 

Does anyone know of legislation in the works to address it?

 

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Blog by Brian Brady
San Diego, California

Nationally recognized mortgage planner, Brian Brady, shares insightful advice for REALTORs about residential real estate finance.

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RE: Guide to the Effect of Mortgage Insurance on Short Sales
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