A report earlier this month in The Boston Globe highlighted practices of some private mortgage insurance companies of pursuing former borrowers (mortgagors) of foreclosed properties for the difference between the amount of their outstanding mortgage debt owed to their lender, and the short-sale price on the homes they no longer owned.
Private mortgage insurance (PMI) protects lenders against excessive exposure in case of a default. The lender is the beneficiary, but the borrower pays the premiums.
In theory, and to be completely fair, PMI conditions shouldn’t be a surprise to any mortgagor who is required to buy it. The conditions are written into the blizzard of contract documents signed at closing. However, mortgagors don’t choose the PMI insurer – the mortgagee does. In practice, closing sessions are often pro forma, with the critical PMI phrases buried in reams of documents requiring signature after signature. During the housing boom, many mortgagors lacked legal representation. Another common misconception is that PMI will pay the mortgage in case the borrower dies. Not so. You still need life insurance for that.
The two borrowers in the Globe piece, both immigrants, were knocking down moderate gross annual household incomes that somehow qualified for mortgages on properties that were not only too expensive for them, but likely overvalued as well. Both borrowers were to rely on rental income to help pay their mortgages.
But the borrowers’ tenants appear to have been economically shakier than their landlords. In both cases they stopped paying rent. In Massachusetts, it can take months to evict someone for nonpayment, while the maintenance and carrying costs of the property continue to come due. Including PMI.
Lay readers of the Globe article could understandably be looking for the rat and finding it incarnate in the PMI companies that went after these borrowers. Seen in the harsh legal and contractual light of law, the worst move the companies made may have been to target vulnerable people. It pushes the outrage meter, but depending on specific circumstances, it’s legal. Also, if the borrowers provided erroneous information on their mortgage applications, whether intentionally or not, they are liable under the current system. Ignorance of the law is no excuse.
PMI companies maintain that they pursue ex-mortgagors who fit the profile of “strategic defaulters” – borrowers who deliberately ceased paying in search of a hypothetical clean start, while still having resources to repay the former obligation (or at least some of it). Remember YouWalkAway.com, which emerged during the housing crisis as a legitimate way to default strategically? Media reports on the company include one from about four years ago in which a couple defaulted on loans on several rental properties they owned, cleared their debt slate and told their interviewer that they were in the process of building a $350,000 multi-bedroom home for their retirement.
No such plummy exit seems to be in sight for the two borrowers in the Globe article. But before putting the rat name on the entire PMI industry, it helps to acknowledge that there may be traps set for insurers and lenders, as well as the people they are supposed to be serving.
