Q: I had a loan that was greater than 80 percent of the value of my home. My loan required me to purchase private mortgage insurance (PMI).
But I recently had to do a deed in lieu of foreclosure because I could no longer afford the increases in the adjustable rate mortgage. Now the PMI company has come after me for the $43,000 they paid the lender due to the deed in lieu.
Is the PMI company allowed to subrogate and go after me for their loss? Isn’t the reason you buy premiums for this coverage and insurance is a calculated risk on their part, so that I wouldn’t have to pay?
A: Your question is quite right on target, given the current turmoil in the housing market.
If you obtained a loan and that loan was greater than 80 percent of the value of the home, your lender would have required you to obtain and pay for private mortgage insurance or PMI.
If you obtained two loans when you bought your property, where one loan was for 80 percent of the value of the home and the other was for an additional amount, perhaps another 10 or 15 percent of the purchase price of the home, you would not have had to pay for PMI.
During the last several years, the method of choice to buy homes and avoid PMI was to obtain a first mortgage loan for 80 percent of the home’s value and any additional money needed was obtained through a home equity line of credit or second mortgage. These loans were often called “piggy-back” mortgages.
Historically, one lender never would loan more than 80 percent loan to value to any borrower. It was too risky. They wanted to make sure they had a cushion of at least 20 percent equity just in case something went wrong financially with the borrower. If the home went down in value, the borrower would suffer the loss first. Property prices would have to fall more than 20 percent before the lender would be affected.
But as housing became more expensive, and saving up a 20 percent down payment became more difficult, borrowers wanted a way to buy a house with less of a down payment. Lenders came up with the concept of having a mortgage insurance company insure the lender for any losses they might sustain for any loans that were greater than the 80 percent loan to value.
But the mortgage insurance company needed to get paid for that risk. That payment came in the form of PMI. The more you borrow above the 80 percent mark, the greater the amount you pay in PMI.
What most borrowers don’t realize is this: PMI is only for the lender’s benefit. Your benefit (and the reason you paid the premium) was that without buying a PMI policy, you would not have been able to get a loan to buy the property.
Since PMI is for the lender’s benefit, if you default on your loan and the property is sold off for less than the loan amount but greater than the original loan-to-value ratio – even if it’s a deed in lieu – your lender gets paid money from the PMI company. The PMI company is on the hook to your lender for the difference between the 80 percent mark and the amount you borrowed.
When you presented the lender with the deed in lieu, you effectively said to the lender “Here are the keys to my property; take the keys and let me out of my loan.” When the lender accepted the keys, it became the owner of the property.
The key question is whether the lender agreed to forgive the balance of the loan. If the lender agreed to forgive the balance of the loan, the PMI company should not have the right to come after you.
You used the term “subrogation.” That term is generally used in the context of insurance claims. If you have a claim against somebody and your insurance company makes you whole, your insurance company would have your rights under that claim to recover the payment they made to you.
In your case, the lender lost out and the PMI company paid the lender money. The PMI company is now coming to you and is trying to recoup its loss.
That might work unless the lender agreed to the deed in lieu and forgave the balance of the debt you owe. If you don’t owe the lender any money, you shouldn’t owe the PMI company any money either.
However, if you simply gave the keys to the lender and the lender didn’t have to go through the foreclosure process to get the title to the home, the lender would still have the right to go after you for any amount still owing on the loan. In this instance, the PMI company paid the lender and has the claim that the lender would have had against you.
The bottom line, and it is a point widely misunderstood by home buyers, is that the PMI company can go after you for any amount you still owed the lender and they can settle that claim any way they want. If they agree to have you pay it over time, you can agree with them to a payment schedule. If they agree to take a lump sum now for substantially less than the $43,000 that you owe, you could agree to that. The PMI company may under certain hardship cases decide to forego some or all of the amount that you may owe.
The key to their claim is their belief that you have the ability and means to pay up. If you do, they will press to get paid. If you don’t have the means to pay and go into bankruptcy, they will stand in line with your other creditors and get paid what they can through the bankruptcy proceeding.
May 8, 2008.