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.