NLIC.org

Freddie Said:

home mortgage insurance - PMI?

We Answered:

Many of the subprime loans did not carry PMI. Rather, the "creative" mortgage companies (in an effort to outdo one another in lending to borrowers who were not creditworthy) came up with the "80-20" product. I don't believe that any loan product is bad in and of itself (I've had an 80-20 myself). However, some mortgage companies allowed borrowers to borrow 20% equity against the house they were buying with the 80% loan and using the 20% for the downpayment for the 80% loan (thereby removing the need for PMI -- on paper! -- since a loan with a Loan-to-Value ratio (LTV) of 80% or below is not considered risky and does not require PMI).

If a mortgage loan carries PMI, you can bet that that loan will be underwritten according to PMI guidelines (which would never have gone alone with subprime "creativity"). If a loan goes into foreclosure that is insured by PMI and PMI takes a look at the loan file and sees that the underwriter violated its guidelines, then that is (rightfully) the responsibility of the mortgage company; not PMI.

If you look at the default statistics, you'll find that the vast majority of the problem is due to subprime borrowers. Loans that are considered "prime" have about the same low default rate as they always have.