How does PMI protect the lender in a foreclosure?
Question: I made an offer on a home that is listed by a realtor but is in pre foreclosure. My original offer was rejected, they countered, I rejected their counter offer and we were stuck. Now the seller's agent has contacted me asking if I would be interested in making another offer. My agent told me that when they countered my offer the lender wanted a certain figure that would make them whole the PMI not withstanding.
I am guessing that there is PMI on the existing mortgage as it was virtually a 100% loan. My question is how does PMI work to protect the lender? Will the lender be compensated 20% of the loan amount? Will the lender be compensated for the entire loss if I make a much lower offer than I did the first time?
Answer: 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.
Just know that unless you are paying 100% of what is owed the Lender, they will need to get PMI to concur with any decision on their part, so they do not lose their opportunity to file the insurance claim, except in the rarest of instances, a Lender may decide to forego the PMI claim.