The Fall Out Continues.

With all of the fall out that has already occurred with the sub prime mortgage debacle. I wanted to address an old addition that home buyers over the last 7 years typically avoided but had to deal with. Private Mortgage Insurance (PMI) is a premium that can be paid upfront or built into the loan. PMI is an insurance that offsets losses in the case where a mortgagor (borrower) is not able to repay the loan and the lender is not able to recover its costs after foreclosure and sale of the mortgaged property. In 2007, PMI became tax-deductible.

In everyday practice, PMI is necessary when a buyer makes a down payment that is less than 20% of the sales price or appraised value (in other words, if the loan-to-value ratio (LTV) is 80% or more). (Hence the rise of the piggy back loans and 100% financing the thorn in today’s mortgage society.) Once the principal is reduced to 80% of value, the PMI is often no longer required. It can happen as a result of a mortgage pay down or through appreciation of the subject property

The nation’s larges provider is the PMI group (PMI, NYSE) based in Walnut Creek, CA. which services its product for residential mortgages, public finance obligations and our favorite ‘asset backed securities’. In the fourth quarter of 2006 they recorded a net income of $100.5 million or $1.19/share; during the same period in 2007 they recorded a loss of $1 billion or $12.51/share. Here is a snap shot of their stock chart over the last 3 years. The stock was as high as $50/share in May of 2007; the stock is trading at $5.97/share as of May 09, 2008.

According to the PMI Group, they expect to pay mortgage insurance claims for its US operations in an amount of $825 – 975 million; this can only mean that the weather is not going to be changing any time soon. Buyers are going to traverse even more obstacles to procure what once was ‘easy money’ and practitioners like me are going to see a real need for seller financing.