what takes care of the lender in a short sale ? pmi?

Foreclosures, Short Sales, Tax Foreclosures
1

When a bank approves a short sale the loan was insured by the private mortgage insurance so how much does the banking institution actually lose in the deal is it a percentage?

I am curious as to the internal workings of this so I can make better short sale decisions

Thanks

2

This is a very good question and while I don’t have first hand knowledge my understanding is that PMI covers the top 20% of the original loan amount.

3

[quote author=Neg8tive link=topic=34223.msg161739#msg161739 date=1201501298]
When a bank approves a short sale the loan was insured by the private mortgage insurance so how much does the banking institution actually lose in the deal is it a percentage?

I am curious as to the internal workings of this so I can make better short sale decisions

Thanks

4

I do believe that it is the top 20% of the opriginal loan is covered with PMI. I’m guessing that you only have one loan to deal with on this short sale. Those are some of the easiest short sales to work with. Good luck.

5

no deal on this one just an educational question

6

I recently completed a short sale, which had a PMI. The insurance company asked for the owner to sign a promisary note for $45k spread over 25years no interest. I told no, and ask them to lower it. they lowered it to $25k spread over 15years same term (no interest). The bank issued a promisary note for $500 payable over 5 months, no interest.

What are some of the thoughts, advise or suggestions on this situation?

7

A lot of folks have a misunderstanding about what part of a loan is insured with PMI. Responses in this thread have suggested the top 20% of the loan amount.

Not true.

Buy a $100K home, put $20K down, finance $80K and there is no PMI required. The reason is that PMI insures the lender against a loss against the top 20% of the purchase price of the property. With 80% LTV financing, PMI will not provide any loan protection for the lender, so no PMI is needed.

If the lender makes a 90% LTV loan, PMI insures the amount that exceeds 80% LTV, or just 10% of the property “value” in this case.

Let’s say a property was purchased for $100K. The buyer paid $5K down and financed $95K. 80% of the purchase price would be $80K, the lender loaned $95K, so PMI covers the loan amount that exceeds $80K, or just $15K in this example. If this property goes to foreclosure and sells for $65K, the limit of the PMI recovery the lender can receive here is still only $15K.

I suspect the short sale situation works the same way.

8

New Information to me. Thanks Dave.

9

I understand that about the pmi but who absorbs the main loss? who insures the banks loans? and to what extent?

10

PMI will absorb the loss up to the limit of the policy coverage. After that it depends on a number of factors - whether the loan is owned by the lender/servicer, or if it has been securitized - how it has been securitized. There is no way for you to know the answer to this.

11

The note holder absorbs the loss. A portion of that loss can be offset by filing an insurance claim with the PMI carrier. Jpopefully, the note holder bought the note at a discount so their loss could be minimal.