Private mortgage insurance (PMI) and credit default swaps

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Private mortgage insurance (PMI) and credit default swaps

Postby bigH » Tue Mar 17, 2009 7:55 pm

So i wondered today, what happened to PMI that was supposed to protect a lender against default for someone who had less than 20% in a property? Shouldn't PMI have protected us against some of these defaults? Was AIG the main underwriter behind PMI? Is there any connection to CDSs?

Thanks!
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Postby caldy » Tue Mar 17, 2009 8:08 pm

AIG owns United Guaranty Insurance Comapny not PMI.
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Postby sscritic » Tue Mar 17, 2009 8:53 pm

Here are a few providers of PMI. AIG's subsidiary is one of many companies to offer mortgage insurance.
    AIG United Guaranty
    CMG Mortgage Insurance Company
    Genworth Mortgage Insurance Corporation
    Mortgage Guaranty Insurance Corporation
    PMI Mortgage Insurance Company
    Radian Guaranty, Inc.
    RMIC (Republic Mortgage Insurance Company)
    Triad Guaranty Insurance Corporation
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Postby yakers » Tue Mar 17, 2009 9:12 pm

Yes, bust ad the OP asked: "Shouldn't PMI have protected us against some of these defaults? "
As long as the insurance company is solvent (and I think that is the issue) then they should pick up the losses and the financial system should not have too big a hit.
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Postby bigH » Tue Mar 17, 2009 9:30 pm

yakers wrote:Yes, bust ad the OP asked: "Shouldn't PMI have protected us against some of these defaults? "
As long as the insurance company is solvent (and I think that is the issue) then they should pick up the losses and the financial system should not have too big a hit.


Yup that is what I'm asking. I'm sure its (PMI trouble) connected somehow.
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Postby DSInvestor » Tue Mar 17, 2009 10:11 pm

I think lots of people were avoiding PMI by using a first mortgage for 80% and a second mortgage for the remaining 5, 10, 20%. I think mortgage lenders were pushing the second mortgages since PMI wasn't deductible until 2007.
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Re: Private mortgage insurance (PMI) and credit default swap

Postby evofxdwg » Tue Mar 17, 2009 10:31 pm

I tried to find out the answer to this question last year. One of the answers i got was they didnt require PMI on those subprime loans. I cant figure out why the mortgage companies would require a low risk person to buy PMI but not a high risk person. I still think something is fishy in this area. There seems to be absolutely no reporting about this.

Also, After a mortgage is sold, if there is PMI, doesnt it still cover the new mortgage holder?

Update: I googled around again and there are now a number of articles that explain why/how the bad borrowers didnt have to purchase PMI. And it still p*sses me off!
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Re: Private mortgage insurance (PMI) and credit default swap

Postby bigH » Tue Mar 17, 2009 11:38 pm

evofxdwg wrote:I tried to find out the answer to this question last year. One of the answers i got was they didnt require PMI on those subprime loans. I cant figure out why the mortgage companies would require a low risk person to buy PMI but not a high risk person. I still think something is fishy in this area. There seems to be absolutely no reporting about this.

Also, After a mortgage is sold, if there is PMI, doesnt it still cover the new mortgage holder?

Update: I googled around again and there are now a number of articles that explain why/how the bad borrowers didnt have to purchase PMI. And it still p*sses me off!


I cant wait for these crooks to go to jail. They will have their day in court.
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Postby yobria » Wed Mar 18, 2009 12:08 am

Even with the govt bailout, the little PMI cos are essentially bankrupt. Nowhere near enough capital to cover the current crisis. The more capital you hold, the smaller your year end bonus during the good times.

Nick
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Re: Private mortgage insurance (PMI) and credit default swap

Postby Jack » Wed Mar 18, 2009 2:58 am

evofxdwg wrote:I tried to find out the answer to this question last year. One of the answers i got was they didnt require PMI on those subprime loans. I cant figure out why the mortgage companies would require a low risk person to buy PMI but not a high risk person.

Most sub-prime loans didn't require PMI because they were charging very high interest rates to cover potential losses -- 8% or 9% for sub-prime vs. 5% for prime. Essentially the banks were self-insuring by charging a higher rate. Why give some of that money to a private insurance company when they could keep all of it for themselves? The banks simply miscalculated the risk of self-insuring. From the borrower's perspective, given the high interest rate, it was as if they were paying PMI. It just wasn't going to a PMI company.
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Re: Private mortgage insurance (PMI) and credit default swap

Postby Valuethinker » Wed Mar 18, 2009 4:08 am

bigH wrote:So i wondered today, what happened to PMI that was supposed to protect a lender against default for someone who had less than 20% in a property? Shouldn't PMI have protected us against some of these defaults? Was AIG the main underwriter behind PMI? Is there any connection to CDSs?

Thanks!


Given the scale of the problem, the PMI industry itself would have collapsed a la the muni bond insurers (and AIG insuring CDOs).

I believe in Canada all mortgage loans over 80% Loan to Value require PMI. Due to tight bank regulation, Canada does not have a subprime lending crisis (although the economy is bad, along with the US).
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Re: Private mortgage insurance (PMI) and credit default swap

Postby Fear and Loathing » Wed Mar 18, 2009 11:02 am

bigH wrote:
evofxdwg wrote:I tried to find out the answer to this question last year. One of the answers i got was they didnt require PMI on those subprime loans. I cant figure out why the mortgage companies would require a low risk person to buy PMI but not a high risk person. I still think something is fishy in this area. There seems to be absolutely no reporting about this.

Also, After a mortgage is sold, if there is PMI, doesnt it still cover the new mortgage holder?

Update: I googled around again and there are now a number of articles that explain why/how the bad borrowers didnt have to purchase PMI. And it still p*sses me off!


I cant wait for these crooks to go to jail. They will have their day in court.


No - they will be lounging on the beach in the Caribbean, sipping Mai tais, - laughing at all the poor suckers they took advantage of....
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Postby giacolet » Wed Mar 18, 2009 11:17 am

No - they will be lounging on the beach in the Caribbean, sipping Mai tais, - laughing at all the poor suckers they took advantage of....


and they will be honored and respected clients of Vanguard, Fidelity and T Rowe Price who have never been known to shun a tarnished coin.
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Postby DaveS » Wed Mar 18, 2009 12:41 pm

The typical sub prime home finance worked like this. Countrywide would give out a FNMA first at say, 6% up to 80% of the homes value, then there would be a sub prime second at about 9% on the 20% of the homes value at the top. Because the first was only for 80% it did not require mortgage insurance. Because the second was high yield it did not require mortgage insurance. The theory was that by packaging up the sub prime loans into huge bond issues, the risk would be diversified away. Also because real estate values "always" go up, the holders of the seconds were not taking a risk. Around about 2005 I realized the seconds were going to be a big problem. What I did not realize was that they could pull down the whole financial system. That I had to learn the hard way. Dave
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