Conspiracy Theory #17

We've all heard of PMI.  It's Mortgage Insurance. 
It reduces the risk of loss to the lender in the case of default. 

In the case of default instead of the lender taking the entire loss, the purchased Mortgage Insurance steps in and covers a portion of the loss.

Who pays for the premium on mortgage insurance. 

Normally it's the borrower.

BUT WHAT IF...

What if the lender, unbeknownst to anyone, quietly purchased Mortgage Insurance to protect their position, to hedge their bets?

Take the case of a lender who's issuing Home Equity Lines of Credit or Seconds on riskier borrowers.  High Loan to Value? Stated Income?  No Problem! 

They bumped the rate just a little higher to cover the cost of a policy after the deal was closed. 

• This wouldn't show up in Title. 
• The Borrower would never know. 
• The Mortgage Broker wouldn't know.  
• Only the Lender would know.

FLASH FORWARD

Today that homeowner is in trouble.  They are behind in payments.  They owe more than what they can sell for.  They are underwater, they've been struggling for months, they want to do the right thing  and a Short Sale is the best option.

The house is listed, the offers come in.  There's a $100,000 deficiency and we're asking the 2nd lender to absorb the greatest portion of the loss.  Why not.  If it goes through foreclosure they'll receive virtually nothing.  Right?

"Hi Mr. 2nd Lender,  I know you lent them $125,000 on a home equity loan a couple of years ago.  You know they are behind, you've read their hardship letter.  I've negotiated with the 1st Lender and they'll give $10,000 to settle.  How about it?  That's a whole lot better than zero.  What do you say?  Do we have a deal?"

SILENCE IS GOLDEN

Mr. 2nd Lender doesn't respond.  Or they turn down the offer.  Or they lose the package repeatedly.  Or any one of the thousand complaints we hear on a daily basis about dealing with loss Mitigation.

Might this be because Mr. 2nd. Lender holds a policy on the loan?  Does that policy have a stipulation that only pays if the home is sold through foreclosure? 

Instead of a 90 something percent loss, the lender (with the help of his insurance policy) will lose  substantially less.  Very much less! 

This cost the lender nothing - the bump in rate paid for the premiums. 

 

Unfortunately, it cost the other players plenty.  The Listing Agent, the Negotiator, the Buyers Agent, the Buyer, the Escrow Officer, and the Homeowner.

I know this isn't as exciting as Black Helicopters, Elvis, Reverse Alien Technology, Grassy Knolls, or Space Shuttles and Earthquakes.

 

 

Hey Scully, what do you think?