Something just doesn’t make sense. Even if a bank extended an adjustable-rate mortgage (ARM) to a borrower with imperfect credit and required less than 20 percent down, isn’t the bank “protected” by private mortgage insurance if the borrower defaults? According to the Federal Reserve Bank,
PMI is extra insurance that lenders require from most homebuyers who obtain loans that are more than 80 percent of their new home’s value. PMI plays an important role in the mortgage industry by protecting a lender against loss if a borrower defaults on a loan and by enabling borrowers with less cash to have greater access to homeownership.
If the bank is insured against the risk of default, where are these massive write-offs coming from?