What has become of the private mortgage insurance that borrowers paid monthly to insure mortgage lenders?
A common misconception about private mortgage insurance is that it is designed to help homeowners, but it’s not — it is meant to protect the lender against borrowers who miss their monthly payments. Most lenders require PMI only if a loan exceeds 80 percent of the price of the house. To avoid paying it, about 40 percent of home buyers in the first half of the decade used “piggyback” mortgages. They took out two loans. The first covered 80 percent of the cost of the home, and the second covered the balance, or at least part of it. With this arrangement, cash-strapped buyers could also avoid making a down payment. But a lot of these risky piggybacks failed. Borrowers lapsed into foreclosure. And insurers lost their own financial footing when they had to cover the growing losses on those loans. In the first six months of this year, the industry had already paid more than $7 billion to cover claims on those foreclosures and costs related to the claims, according to Inside Mortgage Finance
