Truck and Barter: Preventing Foreclosures

May 28, 2004

Preventing Foreclosures

By Kevin

Many mortgage companies are offering low-cost or no direct cost involuntary job loss insurance along with mortgages, as a means of cutting down the transactions costs of foreclosure.

The move to attach monthly payment insurance programs to home loans is not a case of sudden corporate charity or heartfelt compassion for the unemployed. It's a bit more complicated. When borrowers lose their jobs because of layoffs or overseas outsourcing, their mortgage defaults are financially painful for more than their families.

Lenders and mortgage insurers get hurt, too. When unemployment-triggered defaults extend for months and lead to foreclosure, the costs for lenders and insurers can run into the tens of thousands of dollars per home. As a result, many are now eager to provide backup payment insurance designed to keep the homeowning household afloat -- and in the home -- until the breadwinners find new employment.

Posted at May 28, 2004 09:51 PM

Comments

This post caught my eye because I used to work with the mortgage banking industry. But the WPost article is somewhat unsatisfying in its coverage, and I am really surprised at it.

For instance, MGIC already insures the loans -- it just insures them on behalf of the lender. It's called PMI insurance. And the consumer pays the premium for this insurance. The way I read the article, MGIC is simply tacking on this additional 9-month coverage, up to $18,000.

But when you think about it, this additional coverage -- if it is successful in preventing a foreclosure -- simply minimizes MGIC's ultimate risk. (Example: MGIC would rather pay an $18,000 claim and avoid foreclosure, than have to pay off a $180,000 loan balance if the loan goes into foreclosure, something it is already obligated to do under the PMI insurance contract anyway.)

And I'd be willing to bet that MGIC's PMI insurance rates charged to the consumer take into account this "added" risk. To say it is free is to not be entirely forthcoming. As we all know, there is no free lunch.

I'm surprised the WPost didn't bring out these nuances.

Comment by Anita Campbell at June 3, 2004 11:45 PM | Permalink