Private Mortgage Insurance

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?

2 comments… add one
  • carson powers Oct 24, 2008 Link

    Im asking the same question to my representatives and my brokers but no one is talking. Has anyone received an answer. Why doesnt the Private Mortgage Insurance cover the defaults in the subprime market?

    Please let me know

  • Ken Chan Oct 24, 2008 Link

    Are the private mortgage insurers going under? The only way that the banks are taking a hit is if they didn’t require their borrowers to take out PMI or if the insurers aren’t paying.

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