July 2012

TheMReport — News and strategies for the evolving mortgage marketplace.

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FEATURE why regulators have maintained a close watch. Mortgage insurance quotes vary for commercial and home mortgage insurance, and lend- ers need to stay on top of the trends that affect each differently. Whether they offer mortgage in- surance or need to purchase pro- tection, lenders should take time to follow the news and trends that drive the rates and the new- est products being offered. Why PMI? L options available for their pro- tection, including mortgage life insurance and private mortgage insurance (PMI). Regulators—and lawmak- enders also should be pre- pared to offer clients all the not been rising substantially and it's been more difficult for young families to save a sizeable down payment. Having PMI makes the lenders more willing to give mort- gages to people who haven't saved a 20 percent down payment. The purpose of PMI is to pay the mortgage lender if the bor- rower defaults. Until recently, no one was required to notify the bor- able form of insurance involving a home is homeowners insur- ance, which covers damage to the home from natural and man- made disasters. The insurance also covers contents of the house if something should happen, such as a fire or flood. homeowners the right to ask for permission once equity reached the 20 percent level. Of course the most recogniz- tive to complaints that once constituents were required to sign up and pay for PMI, they seemed to be saddled with the insurance premiums forever, even as they reduced the princi- pal through monthly payments and—in many instances—prop- erty values increased, bringing their loan-to-value ratio below the 80 percent threshold. About 1.5 million homeown- ers—have been particularly active in watching private mortgage insurance, which is required of borrowers with a down pay- ment of less than 20 percent. Homebuyers find the insurance particularly onerous precisely because it is required and they pay the premiums for the benefit of the lender. Mortgage insurance companies establish their own underwriting standards—often but not always—mimicking those of government-sponsored enter- prises (GSEs) Fannie Mae and Freddie Mac. Lawmakers have been sensi- Having PMI makes the lenders more willing to give mortgages to people who haven't saved a 20 percent down payment. rower when PMI was no longer needed, and some mortgage companies such as Freddie Mac required borrowers to keep PMI regardless of equity for a number of years—in Freddie's case, five. The Private Mortgage Insurance ers need PMI to get a mortgage in a typical year, and about 10 percent of those who have mort- gages have PMI. For many homebuyers, it's a good thing that PMI exists. In recent years, personal income has 28 | THE M REPORT Act that took effect in 1999 gave homebuyers a number of rights, requiring homeowners be given a written statement explaining that they have PMI and when they'd be allowed to cancel it. The law also required lenders to allow borrowers to can- cel PMI when equity reached 22 percent or more and gave rowers to carry homeowners insurance, at a minimum for the amount of the mortgage, so that if there is a catastrophic event such as a home fire and the house is a total loss, the mortgage company will be able to recoup the remain- der of the balance. Lenders generally require bor- Coverage by Force W insurance? That's where force- placed insurance takes effect in hat if the homeowner can't or won't carry the taken out by a bank or mortgage servicer when a borrower does not maintain the homeowners insurance required by the mort- gage documents. This can occur if the homeowner misses a mort- gage payment, the homeowner allows the homeowners policy to lapse, or if the bank or mortgage servicer determines the bor- rower does not have a sufficient amount of coverage. Force-placed insurance is typically far more expensive than homeowners coverage purchased by a home- owner—anywhere from two to 10 times more costly—yet it often provides less protection for the homeowner while protecting the lender's or investor's interest in the property. The New York hearings were order to carry general home- owners insurance. Force-placed insurance is held specifically, according to Benjamin M. Lawsky, superin- tendent of financial services, to review whether rates for force- placed insurance were "excessive and to examine the relationships between and payments to and from insurers, banks, mortgage servicers, and insurance agents and brokers" following an investigation conducted by the department. "It appears that force-placed insurers charge very high premiums but pay out only a very small percentage of those premiums on claims—as little as 20 cents on the dollar," Lawsky said. "In addition, questionable payments are made to vari- ous players in the force-placed business, further increasing the profits to insurers and banks." The department's six-month investigation, launched in October 2011, revealed that, for force-placed insurance, the percentage of premiums paid on claims, known as the loss ratio, is extremely low—in most cases, dramatically lower than the expected loss ratios insurers filed with the department. For example, based on the investiga- tion, while most insurers filed

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