A short discussion of p.m.i. What is happening to these insurance proceeds?
No loan over 80% loan to value was ever made on a 'conventional' loan without ‘private mortgage insurance’ – insurance for the lender’s benefit in the event of the borrower’s default. The borrower had the honor of paying for this either as a bump to the interest rate charged (“self-insuring” it was called) or as a separately identified charge.
A whole lot of loans in the years of madness were made way over 80% ltv. We never hear one word about these mortgage insurance payouts to the lender. This insurance is not to be confused with pool insurance or default swaps. Surely claims have been made, given the staggering number of defaults.
Where is this money going? Why don’t we hear about it? Why are foreclosing entities submitting claims which do not include these proceeds? Don’t these proceeds as a matter of law reduce the debt? The pmi insured the loan down to 80%, so the ‘lenders’ should be getting insurance funds for any amount over 80%, but they are nonetheless making claims for the entire amount.
Like this: if a loan were 100k, (and 100% ltv) then pmi would cover 20k (100 – 80). For ease of this example, forget any payments made by the borrower. Okay, the borrower defaults. Pmi kicks in and the lender gets paid the 20k. Where did it go? Mojitos?