By Peter G. Miller, RealtyTrac | Published: 8/30/2009
Mortgage insurance companies are a prudent bunch but they have no protection against general economic trends, in particular rising unemployment rates. Now faced with growing claims, mortgage insurance companies have begun to publicize a foreclosure option which can potentially keep large numbers of homes off the auction block and potentially help buyers and investors. If a home is foreclosed on and a mortgage insurance company faces a whopping claim from the loan owner. But what if the foreclosure can be prevented? With a claim advance the mortgage insurance company steps in and tries to prevent a foreclosure. This can be done by bringing the loan current or by paying the lender to lower the interest rate -- a buy-down.
What about the borrower? Typically the mortgage insurance company places a lien against the property, but does not charge interest. The idea is that if the property is sold years in the future the mortgage insurance firm will have a claim against sale value of the property and hopefully recoup its advance. The mortgage insurance company is not helping the borrower out of any charitable impulse. If the home can be saved then the insurer avoids foreclosure and a huge claim by the lender. If the home is foreclosed, then the "claim advance" is a credit against anything owed to the lender -- it's money that would have been spent anyway.
Buyers & InvestorsTo promote claim advances the mortgage insurance industry is now telling the world about "second look" programs and asking consumers to contact mortgage insurance companies when foreclosure looms. This is a good idea, but be prepared with paperwork to show the owner's financial situation just as if asked for a mortgage modification.
While there's obvious connection between lenders, borrowers and mortgage insurance companies, one has to ask if there's also a connection that involves buyers and investors. Imagine that Smith has lost his job and is going to be foreclosed. There's no possibility that he can repay his loan. The mortgage insurance company steps in, checks out Smith's financials, shudders, and says no to a claim advance because the property is going to be lost anyway.
Now let's take the same situation and say that buyer Wilson is willing to buy the Smith property at market value. Alas, market value is less than the mortgage balance, and since Wilson wants a short sale, the transaction depends on the willingness of the lender to take a loss. But imagine if an mortgage insurance company stepped in and said to the lender, we'll give you an amount equal to 10 percent of the original loan value if you'll accept the short sale. Now the interests of buyers, investors, owners, lenders and mortgage insurance companies are aligned. Wilson is getting the property at today's market value, Smith is able to move on, the lender has cut its losses and the mortgage insurance company is not facing a bigger claim.
Why would a lender with mortgage insurance coverage agree to such an arrangement? Even with mortgage insurance coverage, price declines in many markets are so steep that even mortgage insurance policies cannot prevent substantial lender losses. In such cases a short sale with mortgage insurance help may be a far better option for the loan owner than an outright foreclosure.
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