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PMI Companies Hit Hard By the Real Estate Market Downturn

A lot of companies are being hit hard by the real estate market downturn. Included in that group are the Private Mortgage Insurance (PMI) companies. If you are not familiar with the term PMI, here are a couple of short definitions:

“PMI protects the lender against a loss if a borrower defaults on the loan. It is usually required for loans in which the down payment is less than 20 percent of the sales price or, in a refinancing, when the amount financed is greater than 80 percent of the appraised value.”

“PMI consists of insurance policies written by private companies insuring lenders against loss resulting from defaults on mortgages.”

Note that in both definitions I have emphasized that PMI insures the lender against loss. It is not insurance that protects the buyer/home owner. However, it is the buyer/homeowner who foots the bill for PMI, not the lender. This is why I believe PMI is one of the biggest ripoffs in the real estate industry.

Basically, the home buyer is paying an extra monthly premium for insurance that provides them no protection whatsoever. However, very few buyers have the required 20% down payment needed to avoid paying PMI, thus making PMI a necessary evil.

In this slow real estate market awash in foreclosures, banks are losing a lot of money, and they are turning to their PMI policies to collect some of their losses from the PMI companies. This has put the PMI companies in a precarious position.

Mortgage insurer PMI Group Inc. said it lost $274 million in the first quarter, compared with a $102 million profit a year ago. Whenever there’s a default and foreclosure, PMI has to shell out claims to investors that hold the mortgages.Quote_PMI_Ripoff

Higher claim rates were driven by home-price declines and the reduced availability of certain loan products, which made it harder for troubled borrowers to refinance, the company said. Average claim size has grown in part because of higher loan sizes and coverage levels, and because declining home prices limit loss mitigation opportunities.

What does this mean for buyers in the Pensacola real estate market? It means that if buyers have less than 20% of the sales price of a home to put down, it will be harder to get a loan to purchase the home. In these cases, my advice is to go for an FHA loan. Yes, you will still pay PMI, but it appears to be the best alternative in this market.

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  1. Steve

    While there is no direct benefit to borrowers with PMI (other than the ability to buy a home without putting 20% down), there are loan programs available today with no PMI. An example would be the USDA rural development loan. This loan is available in the north half of Escambia county and virtually all of Sant Rosa, Okaloosa and Baldwin counties. It allows the buyer to finance 100% of the appraised value in a purchase transaction.

    If the property appraises for more than the purchase price, it allows you to actually finance closing costs leaving a minimal out of pocket expense.

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