As we know, during the easy credit era of the recent past, many, many people borrowed well in excess of 80% of their home’s purchase price. Stated another way, there were comparatively few folks who came to the closing table with 20% or more in down payment.
Prior to the easy credit days, borrowers on conventional loans with less than a 20% down payment were required to obtain and pay for mortgage insurance. However, with the advent of piggy-back loan programs (e.g. 80% first mortgage, 10% second mortgage, and 10% down payment), mortgage insurance programs declined substantially.
However, mortgage insurance continued to exist in some residential loan transactions, albeit to a greatly reduced degree. Today I am seeing a few short sale transactions where the mortgage insurance company is a part of the consent process, just the same as the first lender. This can pose a real problem – and an unpleasant surprise for sellers – especially where the first lender consents to the short sale, but the mortgage insurer insists upon some form of payment from the seller, either at closing, or, more likely in the form of a promissory note.
The issue is somewhat complex – I will address this in more detail soon. However, for the time being, I would suggest that for Realtors® taking short sale listings – especially where there is only one loan – the question needs to be asked, “Do you have mortgage insurance?” If the answer is “yes”, efforts should be made as early as possible to determine the name of the company and their short sale policy. These policies can vary, so it pays to find out what they are well ahead of time.Posted in Deficiency Liability, Market Conditions, Miscellany, Real Estate General, Real Estate/Distressed, Realtors | Tagged Banks, Distressed Transactions, Market Conditions, Piggy-Back Loans, Promissory Notes, Realtors, Short Sales