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PMI - 6/17/2008 9:01:29 AM
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deliveredarling
Posts: 1897
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If we are being forced to pay Private Mortgage Insurance per month until thirty percent of our house is paid for and others without the required down payment are forced to pay it, then why did the housing bubble burst?
Is that not what the PMI is for, to protect the loans and mortgage companies?
Seems to me this forced payment isn't doing it;s job and we are out of a lot of money all of us could use rather than paying for the mortgage companies to have a false sense of security tat hasn't proven itsel to be secure at all!
Anyone have any insight?
_____________________________
"Now no one after lighting a lamp covers it over with a container, or puts it under a bed: but he puts it on a lampstand, in order that those who come in may see the light."
Luke 8:16
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RE: PMI - 6/17/2008 9:06:41 AM
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Miss Giggles
Posts: 4130
Joined: 4/18/2005
From: MI
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Homes were overvauled in may areas
the 100% 0 down loans did include the pmi, usually it was an 80% mortage with a 20% 2nd mortage
Job losses, etc, left many unable to pay. Some people bought too much house to begin with
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RE: PMI - 6/17/2008 9:17:03 AM
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deliveredarling
Posts: 1897
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I guess what it is I want to know, is why do we have to pay for the insurance if it is of no value? It did not save the mortgage companies or the housing bubble. it seems that we pay for something and nobody gets anything from it. Where is our money going and what is it being used for?
_____________________________
"Now no one after lighting a lamp covers it over with a container, or puts it under a bed: but he puts it on a lampstand, in order that those who come in may see the light."
Luke 8:16
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RE: PMI - 6/17/2008 11:10:44 AM
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GroupW
Posts: 2713
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PMI is there to protect the final investor in the mortgage. A very large portion of those mortgages were eventually bought by Fannie Mae and Freddie Mac. Those institutions are getting the benefit of PMI. Another large fraction of loans were purchased by investment conduits that securitized the loans. The investors in those securities then get the benefit. A smaller portion of the loans were retained by the institutions that originated them.
The reason that a fair number of companies have taken losses is that:
a) not all mortgages were insured. Subprime loans generally do not carry mortgage insurance. The majority of losses have been on non-prime (subprime plus alt-A) mortgages that did not have PMI policies in force.
b) add to that the fact that loans under 80% LTV typically don't have PMI attached. The riskiest loan (other than subprime) is a 70-79.9% LTV loan. Above 80%, PMI is there to help minimize losses. Sligthly below 80% LTV, you still have a highly levered property but no PMI.
The highest, non-insured LTV's generate the biggest losses when they default. There are a lot of mortgages in this LTV tier.
PMI is there for a reason - you're not paying for something that has no value. It's still out there doing it's job.
PMI actually doesn't prevent housing bubbles. In fact, in the US we've had "rolling bubbles" for a number of years now. First internet stocks, then housing, and now commodities. The bubble was caused by a) individuals idiocy in taking out too much debt to buy too much house, b) investors idiocy in not doing sufficient diligence to understand what they were buying, c) ratings agency idiocy in putting AAA ratings out on assets they did not fully understand, and d) too much liquidity in the financial system.
Any clearer? Feel free to ask any and all questions you have. I actually work in the industry doing structured mortgage finance. (I'm one of the few remaining people still employed doing this. For now.)
BT
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RE: PMI - 6/17/2008 11:33:52 AM
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deliveredarling
Posts: 1897
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It's somewhat clearer, thank you. Yet, wht do I have to pay for a risk they choose to make?
_____________________________
"Now no one after lighting a lamp covers it over with a container, or puts it under a bed: but he puts it on a lampstand, in order that those who come in may see the light."
Luke 8:16
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RE: PMI - 6/17/2008 12:12:36 PM
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APZR
Posts: 839
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From: GA
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quote:
ORIGINAL: deliveredarling
Yet, wht do I have to pay for a risk they choose to make?
You asked to borrow their money, they are passing to cost down to you. Or... you could put down a larger down payment and avoid the cost of PMI all together. PMI is not mandatory, it's an option you chose by accepting a larger loan amount. That's also why the 80/20 or 80/10/10 loans became so popular, trying to avoid paying PMI while not having to put anything down. Then when we hit a hiccup in the economy, people walk as they have nothing invested thanks to the "no down payment" schemes. Banks have gone back to their old time ways of requiring 20% down on any purchase. That's the way it was done when I first started in real estate, and that's the way it should be. Buyer without a cash reserve and having something vested, well... the banks SHOULD expect to own more REO. Duuuuh.
< Message edited by APZR -- 6/17/2008 12:24:16 PM >
_____________________________
Ya can't keep trouble from visitin, but you don't have to offer it a chair.
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RE: PMI - 6/17/2008 3:18:55 PM
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GroupW
Posts: 2713
Joined: 11/16/2007
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quote:
ORIGINAL: deliveredarling
It's somewhat clearer, thank you. Yet, wht do I have to pay for a risk they choose to make?
It's really a question of HOW much risk they are willing to take versus how much risk someone ELSE is willing to take. In days of old, banks would tell folks, "Look if you can't come up with 20% down, then I'm not going to lend to you since I don't like the risk."
Then some smart person said, "Well, I don't like the risk of a 95% LTV loan, but I know someone that does. I'll take the risk of the first 75% of the loan give-or-take, and let that someone take the rest of the risk. If I do that, then I can make more loans to more people without increasing my risk unnecessarily."
Think of it as the cost of not having to save that extra 5-15% of the home price and being able to get into a house sooner.
BT
Edit: Forgot about APZR's post. He's right. Later on, some other smart person said, "You know, you can't deduct PMI premiums from your taxes. If we convert that last 5-15% of the home price into a second mortgage that won't require PMI, rather than paying interest on the loan plus non-deductible PMI premiums, we'll just carve the loan into two different pieces. The first mortgage will go to an investor who doesn't require the PMI. That will be the 80% loan to value. The remaining 5-15% loan to value, we'll do that as a second mortgage and sell it to someone who doesn't require PMI. Voila' - instead of non-deductible PMI, we have deductible mortgage interest.
After that it got a bit crazy....
I do disagree with APZR about requiring 20% down. As long as there are lenders willing to take the incremental risk and it's priced correctly, there's nothing wrong per se with a 90% LTV loan to folks with good credit. Old investment saying - there is no bad asset, just bad pricing.
< Message edited by GroupW -- 6/17/2008 3:29:40 PM >
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RE: PMI - 6/18/2008 9:09:32 AM
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relady
Posts: 1038
Joined: 4/11/2005
From: Greater St. Louis Metro
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quote:
there's nothing wrong per se with a 90% LTV loan to folks with good credit. there's nothing wrong per se with 100% mortgages either....but the banks were literally giving them to ANYONE. I mean, to NOT get 100% finaning your credit score had to be und 580 two years ago. So, there were many people getting loans that shouldn't have had loans under any circumstance. And then there were the no-doc loans....those were really a "wonderful" product. Not.
People say it's much easier to walk away if they have nothing invested and I guess that's true to some extent, but it's certainly not the whole story nor the whole reason people are walking away. Most people I've know (and I know a few) that have walked away was after they had exhausted every route they could think of with the bank to try and keep the home and the banks just wouldn't work with them. So....this is an issue that is more complicated than it looks on the surface.
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RE: PMI - 6/18/2008 9:57:56 AM
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GroupW
Posts: 2713
Joined: 11/16/2007
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quote:
ORIGINAL: relady
quote:
there's nothing wrong per se with a 90% LTV loan to folks with good credit. there's nothing wrong per se with 100% mortgages either....but the banks were literally giving them to ANYONE. I mean, to NOT get 100% finaning your credit score had to be und 580 two years ago. So, there were many people getting loans that shouldn't have had loans under any circumstance. And then there were the no-doc loans....those were really a "wonderful" product. Not.
Pretty much, though even the no doc loans have their place. I had to do one at one point. Something like 20% of the market back then though was no/low doc. Should have been closer to 1-2% (if even that high). Making low/no doc loans to people who can actually document income/employment on subprime FICO's at high leverage - that's just stupid.
We now return you to the original post....
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RE: PMI - 6/18/2008 10:11:54 AM
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GroupW
Posts: 2713
Joined: 11/16/2007
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quote:
ORIGINAL: relady
People say it's much easier to walk away if they have nothing invested and I guess that's true to some extent, but it's certainly not the whole story nor the whole reason people are walking away.
The actual statistics behind this are somewhat interesting. Turns out people will tend to hang on to a house even after the LTV goes up beyond 100%. At 125% LTV, people start handing in the keys en masse and really start giving up. There seem to be two factors at stake - one is looking at the home as an investment. Defaults start picking up as home prices decline to the 100% LTV point, but not that dramatically. It picks up markedly as you approach the 125% mark. People seem to value the house for the lifestyle component and the emotional component - it's not just a financial transaction for most folks. At some point, though, people seem to recognize that they just aren't ever going to get their heads above water and cave in.
Interestingly, the 125% mark seems to be coming down. As part of the recent housing bubble, people seem to be emphasizing the investment component over the emotional component and are handing in the keys a bit faster. Makes sense, since many people bought new houses banking on fast price appreciation to deleverage. These folks are faster to hand in the keys since the emotional component of home ownership is a smaller part of the equation.
BT
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RE: PMI - 6/18/2008 1:12:44 PM
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APZR
Posts: 839
Joined: 4/18/2005
From: GA
Status: offline
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quote:
ORIGINAL: GroupW
The actual statistics behind this are somewhat interesting. Turns out people will tend to hang on to a house even after the LTV goes up beyond 100%. At 125% LTV, people start handing in the keys en masse and really start giving up. There seem to be two factors at stake - one is looking at the home as an investment. Defaults start picking up as home prices decline to the 100% LTV point, but not that dramatically. It picks up markedly as you approach the 125% mark. People seem to value the house for the lifestyle component and the emotional component - it's not just a financial transaction for most folks. At some point, though, people seem to recognize that they just aren't ever going to get their heads above water and cave in.
Interestingly, the 125% mark seems to be coming down. As part of the recent housing bubble, people seem to be emphasizing the investment component over the emotional component and are handing in the keys a bit faster. Makes sense, since many people bought new houses banking on fast price appreciation to deleverage. These folks are faster to hand in the keys since the emotional component of home ownership is a smaller part of the equation.
BT
Yeap, I've seen the exact same thing... you put it very well and very accurately. 
quote:
I do disagree with APZR about requiring 20% down. As long as there are lenders willing to take the incremental risk and it's priced correctly, there's nothing wrong per se with a 90% LTV loan to folks with good credit. Old investment saying - there is no bad asset, just bad pricing.
I agree with you here. Nothing wrong with higher LTV, as long as it's properly underwritten and they can afford it.
The knee jerk reaction of some banks requiring 20% down on every purchase has affect me too, so I've changed banks. Found one who understands what I do as an investor and developer. When I buy something I'm getting it at a few cents on the dollar, it's a distressed fire sale. Then I spend big bucks to repair or develop the property to make a 60% or better LTV.
< Message edited by APZR -- 6/18/2008 1:32:03 PM >
_____________________________
Ya can't keep trouble from visitin, but you don't have to offer it a chair.
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