So when a lender is looking to take back a property, they always have the mortgage insurance to fall back on, thus, they will only take an offer down to a certain point. After that, mortgage insurance will compensate the lender’s losses. It would seem that Lender’s Mortgage Insurance is roughly 20% http://en.wikipedia.org/wiki/Private_Mortgage_Insurance, so is it even worth the trouble to make offers less than 20% of what is owed?
Dean
If mortgage insurance applies, mortgage insurance is only required when the downpayment is less than 20%.
The mortgage insurance will cover the difference between the loan amount and 80% LTV. If you purchase with 10% down, the mortgage insurance will only cover the difference between 80% financing and 90% financing.
The mortgage insurance only covers 20% of the loan original purchase price when the loan is for 100% financing.
If the loan was only for 80% financing to begin with, and the borrower defaults, there is no mortage insurance for the lender to fall back on.
So, from a lender’s side, as long as their projected loss is less than 20% loss, they are Ok with that since the mortgage insurnace will cover up to that 20%. Essentially, the lender will end up with a wash and/or break-even. At least on paper. Correct?
But, after the lender has taken the house back in foreclosure, if the final closing value of the house sale is less than 80% of what they made the loan for, i.e., a greater than 20% loss, the lender will take a real dollar loss of everything that the mortgage insurance doesn’t cover. Correct?
Then, on top of just the straight re-sell of the house, their’s numerous holding costs.
The whole point of this question is for me to build case(s) to scare, ummm, I mean, encourage lenders into believing that they will take a loss that mortgage insurance doesn’t cover unless they sell to me. Recently, I’ve been finding realtors that don’t want to submit my offers for REOs because they keep claiming that it’s not worth it because if my offers are less than 80% of what’s owed, the lender won’t take that because mortage insurance will cover it.
Dean
Don’t get hung up on 20%.
You need to know the original loan amount and purchase price at the time the loan was made. If the property was purchased for $100K and financed for $85K, then the lender has made an 85% LTV loan. PMI will only cover the 5% difference between 80% LTV and the higher loan balance.
The PMI liability is reduced as the loan balance falls to 80% or less of the purchase price at which point PMI liability is zero. If the original loan was $100K, and it is now in default with a balance of $80K, then there is no PMI recovery. Even if you make an offer for more than $64K (80% of what is owed) there still is no PMI recovery.
I have heard in the past that lender’s won’t talk to you about a short sale unless your offer is at least 85% of what is owed. I think that number had something to do with the cost of foreclosure in that the lender expected to limit its loss to just 15% or less at a foreclosure sale.
I have no idea how true that is in today’s environment.
Rather than short sale, you may have better luck trying to purchase after foreclosure when the property is an REO. A couple months ago there were quite a few REOs on the market in one condo community I was tracking. On the average, the loans defaulted for $140K. On the average, these properties sold as REOs for $85K (one as low as $65K).
This is where my major problem is. Nearly all REO’s in my area, nearly as soon as the foreclosure auction fails, there is a realtor’s sign in the front yard. Typically within a two weeks or so. Is there a way to get to these REO’s before the lender assigns a realtor?
Dean