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Private Mortgage Insurance

Does PMI protect the homeowner or the bank?

We refinanced our home with NO CASH out for a fixed rate loan in November 2007. We did it with Washington Mutual, but were talked into doing it via fax and internet where we had to sign our power of attorney, etc. Rate sounded great, we had originally purchased the property for only $65K. No one told us (and we found out, it was in very small print, but not the explanation) about PMI, it was on the first NEW payment!! I contested and was then informed that our homes LTV (loan-to-value) was 86.71%. However, our taxes did not go down, etc. Point is, the charge of $162.00 a month was to protect the lender in case of default. Does that mean the lender will be paid if we default? Thank you very much.

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Bill's Answer
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Highlights

  • Private Mortgage Insurance protects the lender, not the borrower.
  • The borrower is still liable for a deficiency balance.
  • Cancel PMI as soon as you reach 80% LTV.

Private Mortgage Insurance (PMI) is insurance provided by non-government insurers that protects a lender against loss if the borrower defaults. PMI is required on non-government-backed loans that exceed 80% of the value of the property. Government loans guaranteed by the Federal Housing Administration (FHA) require another type of mortgage insurance, called MIP, on mortgages with LTV greater than 80%. This mortgage insurance works similarly to PMI.

Although PMI has the word “insurance” in its name, it is not a free pass for homeowners if they default and the property sells for less than the balance of the loan. A sale for less than the balance of the loan that result in a negative balance is a called a deficiency balance. The PMI underwriter will reimburse the bank for the deficiency balance. The underwriter can then sell the collection account to a collection agency. In other words, PMI protects the mortgage company, but does not protect the homeowner.

If the PMI underwriter forgives the loan then it will issue a 1099-C to the homeowner for imputed income. See the Bills.com resource Mortgage Forgiveness Debt Relief Act to learn how to avoid paying taxes on forgiven mortgage debt.

I hope this information helps you make better money decisions.

Best,

Bill

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7 Comments

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  • SS
    Feb, 2011
    Stacey
    Novi, MI
    I completed a short sale in May 2010. I have received my 1099C but with it I received a bill. It states it is a disclosure statement and that it is for informational purposes only. However, it then states "This notice is to advise you of requirements that must be followed to accomplish a prepayment of your mortgage, and to advise you of requirements you must fulfill upon prepayment to prevent accrual of any interest after the date of prepayment. The amount listed below ($1415.69) is the amount outstanding on the loan for prepayment of the indebtedness due under your mortgage. This amount is good through 3/1/2011 (The amount provided is subject to further accounting adjustments. Also, any mortgage payments received or advances made by us before the stated expiration date will change the prepayment amount.)" Before beginning the short sale I called and requested a payoff statement and asked if there was a prepayment penalty. I was told there was not. Also, while working with the loss mitigation specialist assigned to the loan I asked again and was told again there was no prepayment penalty. What is this so called Disclosure Statement and why am I now being asked to pay $1415.69 when this has been closed for almost a year and is showing on my credit report as the debt being cancelled and settled for less than owed?
    0 Votes

    • BA
      Feb, 2011
      Bill
      Unfortunately, the short sale process is not transparent, seemingly chaotic based on my own experience and on the reports of other Bills.com readers, and subject to mystery charges that would be completely intolerable in any other transaction. Where did the mortgage servicer come up with $1,415.69? Why isn't the charge $14,156.90 or $141.56? Who knows? The most galling part of what the servicer sent you was the line "The amount provided is subject to further accounting adjustments." Even if you paid the servicer the $1,415.69 it invented, it is telling you it might concoct some other amount later.

      I realize my rant does nothing to help you, but my ire is based not only on your message but others like it and my own first-hand experience buying a short-sale property. The mortgage servicers do nothing to help their cause by a) promising there will be no pre-payment penalty, and then b) sending undecipherable messages after the fact indicating some balance relating to the pre-payment is due.

      One problem here is $1,415.69 is not pocket change, but it is not a huge amount either. Involving a forensic accountant and attorney will cost you ten times that amount to research and litigate the matter. The most cost-effective manner to dispute this is to ask a lawyer to draft a sternly worded letter to the mortgage servicer to remove the $1,415.69 from your credit report, and that if it does not you will consider suing it in small claims court for breach of contract.
      0 Votes

  • JP
    Jan, 2011
    Jack
    Enfield Town, CT
    "If the PMI underwriter forgives the loan then it will issue a 1099-C to the homeowner for imputed income. See the Bills.com resource Mortgage Forgiveness Debt Relief Act to learn how to avoid paying taxes on forgiven mortgage debt." If a promissory note is signed between a PMI company and a short selling client does this change the amount on the "Forgiven mortgage debt?"
    0 Votes

    • BA
      Jan, 2011
      Bill
      Let us say for the sake of argument that the total amount in question is $100,000 and the insurance company and homeowner reach an agreement where half of the debt is canceled and the homeowner promises to pay the other half. If the insurance company meets the standard for being a financial institution, it is required to issue a 1099-C for the amount of the debt canceled/forgiven. However, if the two parties reach a settlement agreement where there is what is called in law an accord and satisfaction, then there is no debt cancellation or forgiveness and a 1099-C may not be issued.

      The best way to analyze this question is to review the contract. Does the contract contain language such a "canceled" and "forgiven"? Or does it use language that includes "settlement" and "satisfaction"?
      0 Votes

    • PG
      Jan, 2011
      Pridgen
      Coral Springs, FL
      Hello. I have an interesting post. I did complete a successful short sale however, in my case, the PMI would not allow me to be released from the mortgage unless I did one of two things. I had to either A) sign a promissory note owing them 25k or B) pay them a lump sum of 10k. I opted for option B (only because had it at the time). Many of my friends and family thought I made a huge mistake paying this money but I thought if I paid it, I would then have made an agreement with the PMI and then likewise, the mortgage co. would not be able to come after me later on for the excused debt. So to date, I have not received a 1099 c, however I did receive a Satisfaction of Mortgage....what does this mean?? Should I be calling the IRS because I have not received the 1099?
      0 Votes

    • BA
      Jan, 2011
      Bill
      A Satisfaction of Mortgage is issued when the mortgage is paid. This is somewhat analogous to the symbolic "burning the mortgage" after the last payment is made. A Satisfaction of Mortgage is filed with the county clerk to put the world on notice the lender no longer has an interest in the property.

      My guess — note that word choice — is your short sale was structured as an accord and satisfaction in which you, the mortgage servicer, and the PMI provider agreed the short sale and your payment of $10,000 satisfied whatever deficiency balance remained after the property sale. There was no debt cancellation. There was no debt forgiveness. The short sale and your ten grand concluded the mortgage, period. If there was a cancellation or forgiveness, your mortgage servicer is required to issue a 1099-C in the year in which the cancellation or forgiveness occurred.

      Take your short sale contract to a lawyer who has experience in property law or contracts to learn if my theory is supported by the facts.
      0 Votes

    • PG
      Jan, 2011
      Pridgen
      Coral Springs, FL
      Why thank you so much! I think I agree with your theory but agree, it might be wise to show this to a tax attorney because it looks to me that my contact was written for both mortgage holders with mortgage insurance and without(confusing of course). The contract does say that should a debt be "written off" then a 1099C "could" be received. The contact actually uses the term "could". However further down, it also reads with language saying that if a mortgage holder complies with all the terms to the contract then a "release of mortgage or deed of trust" would be prepared. Further down the contract, there is a section that would be filled out only if mortgage insurance is applicable. If there is mortgage insurance (in my case there was), then you would be eligible for the two conditions. This leads me to believe that because my loan involved mortgage insurance, I was given the option to do the one time pay off or sign the promissory note. I do think because I did pay that 10k, I might be excused from the 1099C. The closing took place in 2010 and I believe it's too late to issue one to me now, but just to be careful, I am going to have a tax attorney friend take a glance. Thank you so much. Your response was extremely helpful.
      0 Votes

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