Mortgage insurance adds another and potentially difficult step to closing out a short sale.

Why?  Quite simply it adds another approval needed in the short sale approval process.

When negotiating with the bank for a short sale it may appear that the assigned negotiator is the person that you are dealing with but only on the surface.  The reality is that there are several folks and possible several layers of approvals needed to approval a short sale.

Not only does the mortgage company (the Servicer of the loan) need to approve it but they need to make sure it is within the guidelines of the investor for whom they are servicing the loan.  For example, they may be processing the loan for Fannie Mae and within their guidelines.  Most times they still need to send the short sale to Fannie Mae for approval.  Now add in a mortgage insurance company as well.

Why is this a problem that one more approval must be sought?  Because the mortgage insurance company has to write a check!

When they have to write a check to cover a loss for the investor they want to scrutinize the deal.  Furthermore, they may want a payment from the seller.  Yes, a payment from the seller to help cover the loss.

Mortgage insurance doesn’t help the seller/borrower?

No, in fact the purpose of the mortgage insurance (for which the borrower pays) only serves to protect the banks.  When the seller/borrower defaults then mortgage insurance comes into play to help cover the loss for the lender.  This sounds good for the borrower, right?  Yes, it sounds like normal insurance that protects the purchaser of the insurance.

Unfortunately, this type of insurance you buy helps only the lender and in a default situation where the mortgage insurance company pays, they can turn around and seek payment from the borrower/seller.  Either a partial payment before or at closing or suing the defaulted borrower/seller later for the paid out funds.

If the home you are short selling has mortgage insurance, this needs to be addressed as early as possible in the sale cycle to insure a smooth approval process.

– The Bank Slayer

A frequent question we get is, “What about my mortgage insurance?”

There exists a general perception that MIP (mortgage insurance premiums) paid either all up front (or monthly) somehow covers your loan like GAP insurance protects you on a car loan.  This is wrong.

Mortgage insurance was created to:

a) Make money for the mortgage insurance company (like all insurance products)

b) Protect the lender of your loan in case you don’t pay.

That seems reasonable.  Like is auto & home insurance, right?

Mortgage Insurance is different.

There are many varieties of this kind of insurance but in a nutshell if you go into default and are trying to pull off a short sale or simply go to foreclosure, your mortgage company is going to seek money from the mortgage insurance company, to which you were making monthly (or one time upfront) payments.

So far that makes some sense.  If the mortgage insurance company pays part or all of the loss that would seem to help reduce your exposure to a deficiency lawsuit for the bank’s loss.

Guess what, the dirty little secret is it will not help you.  The mortgage insurance company can come after you for their loss!!   And the mortgage company can too!

Double dipping on the homeowner.

It seems unfair but it is true.  Your mortgage company AND the mortgage insurance company can hit you up for money.   One of the agreements you signed at most closings is a deed of trust (commonly called a mortgage).  This is not the DEED to your home but the document used to secure the loan against your home.  In other words, it outlines what happens if you don’t pay off the promissory note.

In most cases in contains language that allow the lender to collect on items such as mortgage insurance and simply pocket the money.  Bet ya didn’t know that huh?  Nothing like paying for insurance which doesn’t benefit you.  Whether you think it is fair or not you agreed to it.

New wrinkle for the banks

But that aside there seems to be a problem.  What many homeowners have discovered is that the loan sold to you was junk.  Full of ridiculous fees and your final application and Good Faith Estimate (“GFE”) did not match your initial documents.  The loan officer rounded up income and rounded down debt where necessary to maximize their commissions at the onset and origination of the loan.

The mortgage insurance association is not too happy about insuring predatory or fraudulent loans.  It seems they prefer to be in the premium collecting business not the paying out claims business.  They know that the odds of collecting thousands of dollars from a recently foreclosed or short sale homeowner is scarce.  So now they are pursuing the banks that ginned up the lousy loans and asking them to make good on their promise to buy them back (if they where fraudulent).

Jeff Barnes a foreclosure defense attorney posted a good article which is below…

- The Bank Slayer

In a letter dated September 2, 2010 from Teresa M. Casey, Executive Director of the Association of Financial Guaranty Insurers (hereafter AFGI) to Brian T. Moynihan, Chief Executive Officer and President of Bank of America Corporation (hereafter BOA), Ms. Casey notifies Mr. Moynihan of the obligations of BOA (including Countrywide Home Loans) which are owed to the financial guaranty insurance industry “arising from representations and warranties provided by BOA on securitizations, insured by our industry members, of home equity lines of credit (”HELOCs”), and first and second lien residential mortgage loans.”

The letter states that while BOA has publicly announced its intention to challenge its representation and warranty obligations on a “loan by loan” basis, the AFGI “submits that this defensive posture will soon prove ineffective in shielding BOA from the financial, accounting, legal and other implications of its massive obligations to our industry members.”

How massive? The letter states that each of the industry members which has insured BOA securitizations has concluded, based on reports of third-party experts, that “well more than half” of the non-performing loans originated in 2005, 2006, and 2007 “qualify for repurchase by BOA”, and that the current estimate for repurchase liability is in the range of $10 to $20 billion for industry members alone.

The letter states that “all of the HELOC securitizations and tens of billions of dollars of other residential mortgage (including first lien) securitizations sponsored by BOA were insured by our industry members”. The letter goes on to advise that the industry members “are committed to pursuing their rights against BOA for representation and warranty repurchases in connection with our insured securitizations.”

What does this mean for residential foreclosures initiated by BOA? it means that there is and will continue to be unresolved issues as to at least the following:

(a)  whether a loan was misrepresented in any respect to the insurers, including the ability of the borrower to continue payments throughout the life of the loan. If so, this could provide evidence that the loan was predatory and result in a counterclaim or defense to a foreclosure by the borrower.

(b)  the extent of available insurance on the loan (arising out of the apparent coverage and repurchase issues implicated by the letter), which itself gives rise to issues as to available setoffs against amounts claimed due and owing.

(c)  the extent of payments made on defaulted loans in securitizations by whatever insurance may have been available prior to coverage being contested.

(d)  if BOA persists in its “loan by loan” defensive challenge to coverage, a possible stay of any BOA-related foreclosure until it is determined whether securitization insurance on the particular loan the subject of the foreclosure is being challenged by BOA and pending the final disposition of any such challenge.

We have been hammering on these issues as to available insurances and setoffs in securitized loans for years. We have repeatedly sought this information in discovery only to receive objections. We have also had several opposing attorneys claim that no such insurance on securitized mortgage loans even existed. This letter proves that such insurance exists and has existed as to loans originated as far back as 2005, so opposing counsel either (a) lied, or (b) was not informed as to their own client’s operations.

Fortunately, we have had many courts in our cases deem this discovery relevant, and we have had many foreclosures dismissed for the foreclosing party’s failure to provide this very discovery with any refiling conditioned on the subject court-ordered discovery being provided in total. What we see happening in light of this letter are the assertion of additional defenses, additional discovery, and possibly additional claims being made by borrowers in securitization cases. Further, if the insurance industry is making such a claim against BOA, it is probably not long before similar claims will be made against Wells Fargo, US Bank, Deutsche Bank, and the others pursuing foreclosures.

Two questions borrowers frequently ask us,

1. “How did my neighbor get into HAMP (and/or get a loan modification) but I can’t?
2. “Do I have to be delinquent to get a workout plan?”

The best answers typically are:

1. The secret Black Box recipe may not mix well with your situation (read more here on this) because your loan may be very different from your neighbor. ex. FHA vs Conventional, Mortgage Insurance vs none, Freddie vs Fannie, 80/20 vs 90/10, etc.
2. You don’t have to be delinquent but the mortgage companies encourage it. (we have this in writing and in audio)

Add to it that most Mortgage Servicers (the ones collecting your payment):

• give borrowers poor advice based upon the banks own lack of understanding as to what is the best components of HAMP and HAFA in which to place your file;
• are motivated to foreclose as they have bought your loan at a deep discount and now want to flip the home for a profit;
• know that they can keep you in an endless loop of faxing and re-faxing while enticing you to send them some more of you hard earned dollars.

Finally, even the Treasury department is coming to the conclusion that the magic of HAMP is failing to perform as desired.

- The Bank Slayer

From HousingWire

Seth Wheeler, senior adviser to the US Treasury Department, said that one of the main goals of the Obama Administration is to fix the mortgage market in the United States, although federally subsidized modifications may not be appropriate for many borrowers.

Speaking at the American Securitization Forum (ASF) 2010 conference in Washington DC, Wheeler said the focus of the Administration is shifting somewhat away from modifications, as getting borrowers into the Home Affordable Modification Program (HAMP) is not always the best solution.

“Short sales, deeds in lieu are other ways to prevent foreclosures to help achieve [housing] stability,” he said. “Modifications are only for a certain subset of distressed homeowners.”

The Administration’s foreclosure alternative program – the Home Affordable Foreclosure Alternatives program,  or HAFA – will provide incentives to servicers and borrowers that pursue short sales rather than foreclosure. As HousingWire magazine reports ^[1], critics of HAFA say it will dull short sale experts’ competitive edge while other sources warn homeowners will still see short sales as the loss of homeownership.

“They can’t keep their home, but they can avoid foreclosure,” explained Colleen Hernandez, CEO of the Homeownership Preservation Foundation (HPF) – a nonprofit that partners with local governments, borrowers and lenders to facilitate foreclosure alternatives and promote homeownership.

“We are seeing middle class unemployed,” Hernandez said, adding the emerging class of struggling homeowners are unused to financial hardship. “They are slow to apply for benefits, slow to pick up a job that pays less, slow to take up the new world order.” HPF’s services help these borrowers get their arms around total finances as this class tends to be highly indebted with not only credit cards, but also outstanding student loans and car payments. “We help them  prioritize” the wind-down of their obligations, Hernandez added.

“HAMP can not be seen as the only solution,” said Doug Potolsky, a senior vice president at Chase Home Finance. “Chase has aggressive programs that deal with loans that fail HAMP.” Clearly, he said, other solutions are necessary as, in his department, HAMP is not particularly successful. Nearly one-third of Chase HAMP trial modifications result in no repayment, and only 20% ever reach permanent modification status, Potolsky said. “HAMP is not perfect, but improving. I think as a servicer we have to work on building our own [modification] program.” In terms of trying to follow the administrations directive to fix mortgage markets, Potolsky added that option ARM mortgages are particularly challenging to modify.

HAMP servicers completed a total 66,465 permanent modifications through December, according to the latest Treasury report ^[2].

Other panelists at ASF this week feel a heavy reliance on HAMP could even result in a second housing dip. The warning comes after a special inspector on the Treasury’s asset-relief efforts recently warned of a government-induced second housing bubble ^[3]. Another challenge facing the administration, according to ASF director Tom Deutsch, is the 30% of US borrowers that are underwater and facing strategic defaults ^[4]. And this is perhaps the biggest challenge facing the market.

Laurie Goodman, a managing director of Amherst Securities – and a vocal critic of HAMP for its failure to address negative equity ^[5] – responded to Deutsch: “If you have negative equity, you are very, very likely to default.” Goodman added: “Negative equity is the single most driver of defaults.”

Negative equity may be just one of the predictors of borrower mentality leading to strategic default ^[6], an issue HousingWire studies in-depth in the February magazine issue ^[7].

Nancy Mueller Handal, managing director of structured fiance at MetLife, also said at ASF that solving the issue of shadow inventory – homes at danger of default, which Goodman’s team recently estimated to range around 7m units ^[8] – will require a viable non-agency refinancing program in order to prevent the home again reaching default status in two to five years. Under this program, the private market for the mortgage-backed securities (MBS) could re-open, providing need liquidity into the market.

Written by Jacob Gaffney.  Diana Golobay contributed to this report.