Mortgage insurance companies and foreclosure processes

What motivates the mortgage insurance company?

Private mortgage insurance (PMI) companies become involved when a borrower needs a loan larger than 80% of the value of his or her real estate. If neither FHA insurance nor VA guarantees are available, PMI comes into play. The PMI companies write policies that protect lenders from the consequences of loaning more than 80% of the value of a home by insuring a portion of the loan. They must pay off the lender if the loan goes to foreclosure and brings an insufficient amount of money to pay off the loan.

If the lender bids on the property, the PMI company reduces the lender's claim by the amount of the bid, plus any profit made when the lender sells the foreclosed real estate.

Usually, the lender must notify the PMI company when a loan is between 60 and 120 days past due. At that time, the PMI company will ask if the lender has procedures in place to counsel the borrower and attempt to preserve the loan. If not, or if the lender contacts have been ignored by the borrower, then the PMI company will request permission to contact the borrower directly.

Because the insurance company will probably have to pay a claim if there is a foreclosure, it is very motivated to avoid that outcome. If foreclosure cannot be prevented, then the PMI company wants to maximize the sales price of the real estate and, as a result, reduce the amount of its insurance payout.

How does knowing PMI motivation help me negotiate?

First, the PMI company may not be your friend in finding a solution. If the current loan can be salvaged by the PMI company counseling the borrower to enter bankruptcy, the company will do so. That is good for the borrower, the lender, the servicer, and the PMI company, but bad for you.

Not everyone is a bankruptcy candidate, however. In addition, many bankruptcies are converted to liquidations, where the property proceeds to foreclosure. Bankruptcy may only delay the inevitable, while adding to the lender's attorney's fees and other expenses.

Aside from that consideration, remember that for many loans the PMI company will bear the ultimate loss of a foreclosure. Say you want to buy a preforeclosure property worth US Dollars 120,000 but with an outstanding loan balance of US Dollars 119,000. The lender might be willing to write the loan down to US Dollars 96,000 and allow assumption with no money down. In the alternative, the lending company might be willing to accept US Dollars 96,000 as payment in full for the loan. However, the lender must check with the PMI company first because the PMI company will probably have to write the lender a check for the difference between the value of your offer and the outstanding balance on the loan.

You have those same considerations if you are buying property that has already been foreclosed. The PMI company takes into account the lender's foreclosure bid price, plus the ultimate sales price of the home. Naturally, the PMI company wants the sales price to be as high as possible.

Although PMI companies can and do request permission from servicers to negotiate workouts, they do not always have that opportunity.You will usually be negotiating with the servicer, even though the PMI company and the presence of its insurance is a very important consideration.

I never like to trust someone else to do my negotiating for me. If the person I am talking to must persuade someone else of the wisdom of my plan, I put all my arguments in writing. That way, the person with whom I am talking can simply copy my writing and transmit it to the third-party decision-maker. If you follow the same strategy, especially when it is likely the loan has PMI coverage, you will meet with greater success in your negotiations.

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