If most subprime mortgages require PMI, Why are subprime lenders going bankrupt, not the insurance companies?

Answer 1

Hi I am a real estate agent. Most sub prime lenders are not going bankrupt but because the media was making a big deal about the largest sub prime lender filing bankruptcy. I must have seen that same news event told at least 22 times.

Also one would think, after watching the t.v. news, that folks who bought homes and used a sub prime lender are all going into foreclosure. The facts and data clearly show some are but most are not. In fact, most customers who used sub prime services are making their payments just fine.

As a real estate agent I'll tell you the truth and reality of the matter is that Subprime doesn't mean people with horrible credit or only high risk people.

Sub prime means "the majority" of people in the United States. Facts show that the majority of folks in the U.S. would, if they wanted to buy a house, have to go to a sub prime lender as their FICO scores are not meeting the requirements the banks have now.

In fact the reason the market shot up like it did was "because" of sub prime loans.

People that could never get a house were now qualifying and so you had buyers coming out of the woodwork.

Then as the market hit its peak the banks tightened their requirements and so you saw a slowing of the market.

Most folks think, incorrectly so, that what happened was the steps below.
Step 1. Banks had sub prime loans being offered.
Step 2. Buyers used these loans and it lowered the home values
Step 3. The market then had a crash

The above steps is what the media seems to be perpetuating but its just hogwash because in reality it is the subprime market that caused real estate values to sky rocket.

In reality here is what happened.
Step 1. Banks loosened up their requirements
Step 2. This put a flood of buyers, previously not able to buy, into the market place.
Step 3. With demand being more than the supply, it's simple economics 101 what happened. Properties became more scarce and so prices shot up
Step 4. Buyers continued buying and prices started to slowly level off. From May of 2006 to about November 2006 they leveled off.
Step 5. Then here is what happened. The banks then tightened their requirements as they saw that values were leveling off. Banks don't really want to lend money when property values are on the downward motion so they tighten up their qualifications to get very low risk buyers.

That's what they did. Well that shut out most, not all, but most of the buyers in the pool waiting to buy. Now they couldn't qualify. Even houses that were in escrow started falling out because the buyer now could not qualify.

That is the true facts of what happened. So when folks on the news or media open their mouths they really don't know what they are talking about.

Ask me, I was there. I know.

Answer 2

Since the note went into foreclosure the original lender is now required to repurchase the loan from their investor.

With all the repurchase the lender now have his money tied up and can no longer lend money, which is their primary method of earning money.

So without the ability to do their primary thing they have to go bankrupt.

PMI is a different company and only insure loans in excess of 80% of the appraised value. Since most sub-prime loans are 80% and below there was no PMI charged.

Lenders got around the PMI because they would make two loans, one for 80% and the other for 20% if they were going to make a 100% loan.

As one of the others said with PMI now tax deductable for certain borrowers the PMI companies are making a strong come back.

I hope this has been of some use to you, good luck.

"FIGHT ON"

Answer 3

Subprime mortgages NEVER require PMI. Not sure where you got that info from.

That being said, sometimes the lender does get their loans insured, but it's paid for already in the interest rate the client is paying.

MI companies have been hit lately too, but not as bad. Over the past few years, it was so easy to do an 80/20 to avoid any possibility of mortgage insurance, that most loans out there aren't insured.

With the 2007 law allowing MI to be tax deductible, and the tightening of lending guidelines, MI is gaining their market share back pretty well right now. So is FHA.

Also, many of these loans that did go bad, went bad so quickly that they fall under the early payment default clause. Usually, if a loan falls behind in the first 6 months, whoever wrote the loan initially is required to buy it back.

Answer 4

There are a few answers to your question.
1. Many subprime lenders were issuing 80/20 loans to avoid having borrowers pay for PMI.
2. PMI does not cover the entire mortgage just a portion of it.
3. (and most important)Lenders make the loans, and then sell them to other lenders that group them and sell them as investments to investors. Because consumer confidence is down investors are not willing to put thier money into packages with subprime loans unless there is a higher inrterest rate. Subprime lenders have thus been unable to sell thier loans for full price(currently going for .90 cents on the dollar), and therefore can not relend the money they have tied up in the first loans. They can no longer effectively do business.

Answer 5

Because they may be self-insuring the loans, and collecting "pmi" to boost their fees income. PMI is necessary if the lender sells the loan on the secondary market. Most sub-prime lenders aren't interested in selling the loans on the secondary mortgage market, but rather taking possession of the property being financed. This works if the market hasn't crashed, but in a declining market, a property that is "over-financed" provides the lender with no collateral and in the event of foreclosure, the lender will lose money...... that's why "over-financed" sub-prime lenders are going bankrupt

Answer 6

Shakey credit pretty much automatically qualifies you as subprime, unless you've got good equity (20%). Also, "More than 30 days late" suggests you HAVE made 30 day late pays, which is a big red flag and suggests you got into a little bit of trouble here and there. Go talk to a mortgage broker. They'll tell you what you can get before you sell, so you know if its worth it.

Answer 7

They found a loophole around pmi, 80/20 loans. Now that loophole is biting them in the a%% because when people default, there is no insurance to pay the loan off.

Answer 8

Because PMI is only charged on that portion of the mortgage value which exceeds 80% of the appraised value of the house. The remainder is not insured.

Answer 9

I think the problem is that these companies have such a bad reputation of loans defaulting that they can't get money to loan anyone anymore. So they can't create any new loans and new business. Without enough new business coming in the door, they just can't keep going.

These morgage companies have to get money from somewhere to loan people, or they have to sell the loan contracts to investors. And the way business is going I wouldn't give them my money.

Answer 10

Hmmm. Get some professional advice- this is a tough one