Private mortgage insurance (PMI) covers a mortgage holder in the event a mortgage goes delinquent. Mortgage borrowers who borrow more than 80 percent of their home's value must pay for PMI. PMI companies may approve short sales and deed-in-lieu transactions or may delegate their approval to the mortgage holder. PMI companies are liable for paying mortgage lenders' claims for losses arising from short sales or deeds in lieu of foreclosure.
PMI companies typically compare losses incurred if they approve a short sale or deed in lieu with losses incurred through foreclosure. If a mortgage servicing company agrees to accept a short sale or deed-in-lieu transaction without appropriate PMI approval, any claim funds payable by the PMI company could be forfeited or reduced. Mortgage investors typically require mortgage servicers to absorb losses resulting from failing to get PMI approval; this is why mortgage servicing companies are careful to comply with PMI requirements for approving short sales and deeds in lieu.
Investors and Servicers
Chances are, your mortgage was quickly sold to another company after closing. The original company may have continued as the "loan servicing company" or may have sold the loan servicing rights to another company. The servicing company processes mortgage payments and takes care of day-to-day administrative tasks such as issuing pay-off statements and paying real estate taxes and hazard insurance on behalf of homeowners. The owner of your mortgage loan is called the mortgage holder or investor. This company pays the servicing company. Requests for short sales and deeds in lieu are reviewed by the servicing company and may be passed on to the mortgage investor and PMI company for approval.
Short Sale Approval
A short sale involves the sale of a mortgaged home for less than the amount owed on the mortgage loan. Here's an example: Joe and Jane bought a home for $200,000, but the home's value fell to $100,000. They were offered $100,000 for their home, but Joe and Jane still owed $160,000, plus interest, legal fees, property taxes and insurance. The mortgage investor faces a loss of more than $60,000, but this loss will be reduced by the PMI company paying the servicing company's claim. If the loss for a short sale is significantly less than the estimated loss after foreclosure, the mortgage investor and PMI company are likely to approve the short sale.
Homeowners may ask their mortgage holders to accept a deed granting the lender title to their home when they cannot sell the home or continue making payments. The lender agrees not to foreclose in exchange for the property deed. Mortgage investors and PMI companies evaluate deed-in-lieu requests based on a borrower's hardship and any potential savings that can be realized by accepting the deed rather than foreclosing. Depending on state law, a foreclosure can take a few months to a year or more. The longer it takes a mortgage investor to gain title to a home when no payments are being made, the larger the losses to the mortgage investor and PMI company.
As of Nov. 1, 2012, several PMI companies reached an agreement with Fannie Mae and Freddie Mac allowing mortgage servicing companies or mortgage investors to review and approve short sales and deeds in lieu. This agreement is designed to shorten the time needed for approving deed in lieu and short sale transactions. Cooperating with all requests from your mortgage servicing company can help expedite approval of a short sale or deed-in-lieu transaction.