Mortgage insurance
Encyclopedia
Mortgage insurance is an insurance policy which compensates lenders or investors for losses due to the default
of a mortgage loan
. Mortgage insurance can be either public or private depending upon the insurer. The policy is also known as a mortgage indemnity guarantee (MIG), particularly in the UK.
For example, suppose Ms Smith decides to purchase a house which costs $150,000. She pays 10% ($15,000) down payment and takes out a $135,000 ($150,000-$15,000) mortgage on the remaining 90%. Lenders will often require mortgage insurance for mortgage loans which exceed 80% (the typical cut-off) of the property's sale price. Because of her limited equity, the lender requires that Ms Smith pay for mortgage insurance that protects the lender against her default. The lender then requires the mortgage insurer to provide insurance coverage at, for example, 25% of the $135,000 ($33,750), leaving the lender with an exposure of $101,250. The mortgage insurer will charge a premium for this coverage, which may be paid by either the borrower or the lender. If the borrower defaults and the property is sold at a loss, the insurer will cover the first $33,750 of losses. Coverages offered by mortgage insurers can vary from 20% to 50% and higher.
To obtain public mortgage insurance from the Federal Housing Administration
in the United States, Ms. Smith must pay a mortgage insurance premium (MIP) equal to 1 percent of the loan amount at closing. This premium is normally financed by the lender and paid to FHA on the borrower's behalf. Depending on the loan-to-value ratio, there may be a monthly premium as well. The United States Veterans Administration also offers insurance on mortgages.
in the United States. Master policies generally require timely notice of default include provisions on monthly reports, time to file suit limitations, arbitration agreements, and exclusions for negligence, misrepresentation, and other conditions such as pre-existing environmental contaminants. The exclusions sometimes have "incontestability provisions" which limit the ability of the mortgage insurer to deny coverage for misrepresentations attributed to the policyholder if twelve consecutive payments are made, although these incontestability provisions generally don't apply to outright fraud.
Coverage can be rescinded
if misrepresentation or fraud exists. In 2009, the United States District Court for the Central District of California determined that mortgage insurance could not be rescinded "poolwide".
created a model law.
Default (finance)
In finance, default occurs when a debtor has not met his or her legal obligations according to the debt contract, e.g. has not made a scheduled payment, or has violated a loan covenant of the debt contract. A default is the failure to pay back a loan. Default may occur if the debtor is either...
of a mortgage loan
Mortgage loan
A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...
. Mortgage insurance can be either public or private depending upon the insurer. The policy is also known as a mortgage indemnity guarantee (MIG), particularly in the UK.
For example, suppose Ms Smith decides to purchase a house which costs $150,000. She pays 10% ($15,000) down payment and takes out a $135,000 ($150,000-$15,000) mortgage on the remaining 90%. Lenders will often require mortgage insurance for mortgage loans which exceed 80% (the typical cut-off) of the property's sale price. Because of her limited equity, the lender requires that Ms Smith pay for mortgage insurance that protects the lender against her default. The lender then requires the mortgage insurer to provide insurance coverage at, for example, 25% of the $135,000 ($33,750), leaving the lender with an exposure of $101,250. The mortgage insurer will charge a premium for this coverage, which may be paid by either the borrower or the lender. If the borrower defaults and the property is sold at a loss, the insurer will cover the first $33,750 of losses. Coverages offered by mortgage insurers can vary from 20% to 50% and higher.
To obtain public mortgage insurance from the Federal Housing Administration
Federal Housing Administration
The Federal Housing Administration is a United States government agency created as part of the National Housing Act of 1934. It insured loans made by banks and other private lenders for home building and home buying...
in the United States, Ms. Smith must pay a mortgage insurance premium (MIP) equal to 1 percent of the loan amount at closing. This premium is normally financed by the lender and paid to FHA on the borrower's behalf. Depending on the loan-to-value ratio, there may be a monthly premium as well. The United States Veterans Administration also offers insurance on mortgages.
Private mortgage insurance
Private mortgage insurance is typically required when down payments are below 20%. Rates can range from 0.5% to 6% of the principal of the loan per year based upon loan factors such as the percent of the loan insured, loan-to-value (LTV), fixed or variable, and credit score. The rates may be paid in a single lump sum, annually, monthly, or in some combination of the two (split premiums). In the U.S., payments by the borrower are tax-deductible until 2010.Borrower-paid private mortgage insurance
BPMI or "Traditional Mortgage Insurance" is a default insurance on mortgage loans provided by private insurance companies and paid for by borrowers. BPMI allows borrowers to obtain a mortgage without having to provide 20% down payment, by covering the lender for the added risk of a high loan-to-value (LTV) mortgage. The US Homeowners Protection Act of 1998 allows for borrowers to request PMI cancellation when the amount owed is reduced to a certain level. The Act requires cancellation of borrower-paid mortgage insurance when a certain date is reached. This date is when the loan is scheduled to reach 78% of the original appraised value or sales price is reached, whichever is less, based on the original amortization schedule for fixed-rate loans and the current amortization schedule for adjustable-rate mortgages. BPMI can, under certain circumstances, be cancelled earlier by the servicer ordering a new appraisal showing that the loan balance is less than 80% of the home's value due to appreciation. This generally requires at least two years of on-time payments. Each investor's LTV requirements for PMI cancellation differ based on the age of the loan and current or original occupancy of the home. While the Act applies only to single family primary residences at closing, the investors Fannie Mae and Freddie Mac allow mortgage servicers to follow the same rules for secondary residences. Investment properties typically require lower LTVs.Lender-paid private mortgage insurance
LPMI is similar to BPMI except that it is paid for by the lender, and the borrower is often unaware of its existence. LPMI is usually a feature of loans that claim not to require Mortgage Insurance for high LTV loans. The cost of the premium is built into the interest rate charged on the loan.Contracts
As with other insurance, an insurance policy is part of the insurance transaction. In mortgage insurance, a master policy issued to a bank or other mortgage-holding entity (the policyholder) lays out the terms and conditions of the coverage under insurance certificates. The certificates document the particular characteristics and conditions of each individual loan. The master policy includes various conditions including exclusions (conditions for denying coverage), conditions for notification of loans in default, and claims settlement. The contractual provisions in the master policy have received increased scrutiny since the subprime mortgage crisisSubprime mortgage crisis
The U.S. subprime mortgage crisis was one of the first indicators of the late-2000s financial crisis, characterized by a rise in subprime mortgage delinquencies and foreclosures, and the resulting decline of securities backed by said mortgages....
in the United States. Master policies generally require timely notice of default include provisions on monthly reports, time to file suit limitations, arbitration agreements, and exclusions for negligence, misrepresentation, and other conditions such as pre-existing environmental contaminants. The exclusions sometimes have "incontestability provisions" which limit the ability of the mortgage insurer to deny coverage for misrepresentations attributed to the policyholder if twelve consecutive payments are made, although these incontestability provisions generally don't apply to outright fraud.
Coverage can be rescinded
Rescission
In contract law, rescission has been defined as the unmaking of a contract between parties. Rescission is the unwinding of a transaction. This is done to bring the parties, as far as possible, back to the position in which they were before they entered into a contract .-In court:Rescission is an...
if misrepresentation or fraud exists. In 2009, the United States District Court for the Central District of California determined that mortgage insurance could not be rescinded "poolwide".
History
Mortgage insurance began in the United States in the 1880s, and the first law on it was passed in New York in 1904. The industry grew in response to the 1920s real estate bubble and was "entirely bankrupted" after the Great Depression. The bankruptcy was related to the industry's involvement in "mortgage pools", an early practice similar to mortgage securitization. The federal government began insuring mortgages in 1934 through the Federal Housing Administration and Veteran's Administration, but after the Great Depression no private mortgage insurance was authorized in the United States until 1956, when Wisconsin passed a law allowing the first post-Depression insurer, Mortgage Guaranty Insurance Corporation, to be chartered. This was followed by a California law in 1961 which would become the standard for other states' mortgage insurance laws. Eventually the National Association of Insurance CommissionersNational Association of Insurance Commissioners
The National Association of Insurance Commissioners is an Internal Revenue Code Section 501 non-profit organization which seeks to organize the regulatory and supervisory efforts of the various state insurance commissioners from around the United States. The NAIC was formed in 1871. Its current...
created a model law.
See also
- Credit insuranceCredit insuranceCredit insurance is a term used to describe both business credit insurance and consumer credit insurance, e.g., credit life insurance, credit disability insurance Credit insurance is a term used to describe both business credit insurance (a.k.a. trade credit insurance) and consumer credit...
- Lenders mortgage insuranceLenders mortgage insuranceLenders Mortgage Insurance , also known as Private mortgage insurance in the US, is insurance payable to a lender or trustee for a pool of securities that may be required when taking out a mortgage loan...
- Canada Mortgage and Housing CorporationCanada Mortgage and Housing CorporationCanada Mortgage and Housing Corporation is a Crown corporation, owned by the Government of Canada, founded after World War II to provide housing for returning soldiers...
- Credit default swapCredit default swapA credit default swap is similar to a traditional insurance policy, in as much as it obliges the seller of the CDS to compensate the buyer in the event of loan default...
- FHA insured loan
External links
- Private Mortgage Insurance as a Tax Deduction from MortgageNewsDaily.com.
- PrivateMI.com, the website for Mortgage Insurance Companies of America (MICA), the industry's trade group