Q: If everyone who bought a home without putting 20 percent down was forced to pay private mortgage insurance (PMI), why are we having this housing crisis? Shouldn’t PMI have paid the bank for these foreclosures?
-- Michael Luna, Social Circle
A: Private mortgage insurance was required if the loan exceeded 80 percent of the home's appraised value and the bank wanted to sell it to a government-sponsored enterprise such as Fannie Mae, Freddie Mac or a Federal Home Loan Bank, Michael Eriksen, an assistant professor of real estate at the University of Georgia, told Q&A on the News. The "borrower would pay a monthly premium to an outside company that would reimburse the lender the first 20 percent of any loss should the borrower stop making payments. However, the lender would still be responsible for any losses over the 20 percent threshold," Eriksen wrote in an e-mail. "This limitation of loss by the PMI company explains why some banks are still incurring losses after house prices recently dropped by more than 20 percent." Eriksen added that banks didn't require borrowers with less than a 20 percent down payment to pay PMI over the past decade. Banks instead offered two loans. The first loan would be equal to 80 percent of the home's value and that lender would be reimbursed from the proceeds of foreclosure if the borrower stopped making payments. The second loan, sometimes referred to as a home equity line of credit, would be for the remainder of the balance. Banks often sold the first loan to an outside investor and kept the higher interest payments of the second. If the borrower stopped making payments, the banks recovered losses only after the first lender was paid in full.
Lori Johnston wrote this column. Do you have a question about the news? We’ll try to get the answer. Call 404-222-2002 or e-mail q&a@ajc.com (include name, phone and city).
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