How Mortgage Insurance Sneaks Into a Short Sale

Think you don’t have mortgage insurance? Think again. Mortgage insurance is one of the biggest problems plaguing short sales in Sacramento and across the country these days. If your home is underwater, you can have mortgage insurance and not know it. At any time, your mortgage lender can plop private mortgage insurance on your home without your knowledge nor your permission. How do they get away with it? Your lender can pay for this coverage out of its own pocket. That’s why the lender doesn’t need your permission. Because you’re not paying for mortgage insurance. Not out of pocket, anyway. You pay for it in other ways.

Doesn’t it strike you a bit odd that there is a marketplace for this kind of insurance? You might scratch your head and wonder: how are they making money? Well, part of the way they make money is for the mortgage lender to buy an interest in the private mortgage insurance company. I know it kinda sounds like they are in bed with the mortgage insurance company, and you know what? They are. And it’s perfectly legal. Isn’t this like the coolest investment idea ever? Not! But it’s going on, and it’s happening right under your nose, and probably it’s happening to your own house. As a Sacramento short sale agent, I see this more often than not.

Say you’ve got House A in Sacramento that is worth $100,000, but it has a mortgage that is serviced and owned by Big Fat Bank. That mortgage balance is, say, $300,000. Big Fat Bank doesn’t want to tell its investors that much of the assets listed on Big Fat Bank’s asset sheet are worth 30 to 50 cents on the dollar. Because that would make Big Fat Bank’s stock worth less. If Bank Fat Bank isn’t worth what Big Fat Bank says it is, then investors might take their dollars out of Big Fat Bank and Big Fat Bank might collapse.

So, Big Fat Bank buys an interest in, say, Itsy Bitsy Mortgage Insurance. It asks Itsy Bitsy Mortgage Insurance to write an insurance policy on House A, insuring a portion of that $300,000 in the event of loss. Big Fat Bank writes off the insurance premiums it pays to Itsby Bitsy Mortgage Insurance, and part of those insurance premiums are rebated to Big Fat Bank. Not only that, but when House A goes belly up, Itsby Bitsy makes money even though it must pay out to Big Fat Bank. And Big Fat Bank makes money.

Everybody is happy.

Unless the seller of House A is trying to do a short sale. Then, not only must Big Fat Bank approve the short sale, but so must Itsy Bitsy Mortgage Insurance. Suddenly, there is another player in the short sale, another layer to the process, and Itsy Bitsy Mortgage Insurance might not approve the short sale. Or, Itsby Bitsy might demand a payoff from the seller of House A or from another party to the short sale. Aren’t you glad you chose Itsy Bitsy? Oh, wait. You didn’t.

But even if Itsby Bitsy Mortgage Insurance has to pay Big Fat Bank, due to a loss suffered by Big Fat Bank in a short sale, Itsby Bitsy still makes money and so does Big Fat Bank. Hey, this is America.