The Crisis and Your Pocketbook
Friday, September 26, 2008
Here we address readers' questions about the financial crisis. To submit a question, go tohttp:/
Q. What has become of the private mortgage insurance that borrowers paid monthly to insure mortgage lenders?
A. A common misconception about private mortgage insurance is that it is designed to help homeowners, but it's not -- it is meant to protect the lender against borrowers who miss their monthly payments.
Most lenders require PMI only if a loan exceeds 80 percent of the price of the house. To avoid paying it, about 40 percent of home buyers in the first half of the decade used "piggyback" mortgages. They took out two loans. The first covered 80 percent of the cost of the home, and the second covered the balance, or at least part of it.
With this arrangement, cash-strapped buyers could also avoid making a down payment.
But a lot of these risky piggybacks failed. Borrowers lapsed into foreclosure. And insurers lost their own financial footing when they had to cover the growing losses on those loans. In the first six months of this year, the industry had already paid more than $7 billion to cover claims on those foreclosures and costs related to the claims, according to Inside Mortgage Finance. Their stock also plummeted.
For home buyers, getting these piggyback mortgages is nearly impossible now. That means the chances of securing a no-down payment loan -- and avoiding private mortgage insurance -- have diminished.
I am a homeowner who works hard to pay my mortgage. Why should my tax money be used to help fix a problem I did not create?
Bush administration officials say they have no choice. They say lending would come to a halt without this bailout. In his most recent speech to the nation, President Bush outlined the potential fallout: Businesses would close their doors. Americans would lose their jobs. Loans for homes, cars and college tuition would be tough to find. And retirement nest eggs would dwindle.
Also, keep in mind that a growing number of troubled borrowers did not contribute to the problem. Some took out traditional fixed-rate loans. But when home prices sank, they suddenly owed more on their mortgages than their homes were worth. They could not refinance if they needed to move for a job or other personal reasons, such as divorce.
If it's any consolation, you still come out ahead of a less-deserving borrower. You have not lost your home and your credit score is intact.