Mortgage Insurance: From Good to Bad and Ugly
In the first edition of Create A Short Sale, Your Guide Through the Short Sale Maze, I devoted a chapter to singing the praises of mortgage insurance companies. The mortgage insurance company had helped me get a short sale approved by explaining to the servicer that the short sale created a smaller loss for the investor (and the mortgage insurance company) than the foreclosure. As a result, the short sale was approved. Those were the good old days. I had other sales where the review by the mortgage insurance company was quick and supported the approval of the short sale.
Mortgage insurance companies are involved in any sale that does not have a substantial down payment, usually 20%. They are also involved in other real estate purchases to lessen the risk to the investor. Typically, they insure the first dollar losses on a loan. Normally they will cover the first 15% to 28% of principal balance of the loan. So, if the insurance company covers 15% and the re-payment on the principal of the loan is 12% short, the mortgage insurance company covers the loss and the investor recovers the full principal balance of the loan. In contrast, if the mortgage insurance company insures 15% of the loss and the loss is 21%, the mortgage insurance pays for the 15% and the investor takes the rest of the loss. While the laws vary from state to state, it may be possible for the mortgage insurance company to pursue the borrower to recover some of the loss.
When you have an FHA Short Sale, there is almost always mortgage insurance if the borrower used the low down payment allowed by FHA. The low down payment is the primary reason that most borrowers use FHA financing, so you almost always have mortgage insurance with an FHA Short Sale. Many of the mortgage guarantee companies have given the servicers ?delegated authority? i.e. the ability to approve a short sale without further review by the mortgage insurance company if it meets certain standards. You can find the standards at https://www.efanniemae.com/lc/sir/pdf/midelauthchecklist.pdf . One of the requirements is that the borrower has to be at least 60 days delinquent and considered past due for the third payment. This requirement bothers me because it penalizes people who work hard to keep their payments current.
For buyers without sufficient down payment, mortgage insurance companies perform the valuable function of allowing those buyers to buy a home. In the good old days, they also helped Realtors to close short sales because they realized that the loss would be lessened by a short sale.
Mortgage insurance companies have gone from good to bad and ugly. John?s story will explain it all.
John owned a condo in Raleigh that was underwater. He never should have paid the original purchase price for it because it was never worth that much. However, he was from California and compared to California prices, it looked like a good deal. To make a long story short, some of the people who converted the property from a rental community to condos are doing long jail terms. Almost no one in Raleigh bought them, they were sold to out of state investors during the run up of the real estate bubble.
Because the price was too high, the loan was too large and the payments were too big. As a result, the property could not be rented for enough money to cover the mortgage payments and homeowners dues. John tried to handle the negative cash flow, but had a huge financial setback so he desperately needed to sell the property.
My team found a buyer agreed to pay the market value for the home. My team includes attorneys involved in the negotiations, so the term “we” includes them. A short sale package was submitted to Chase who took way too long to review it. That buyer walked away. We found another buyer, but John?s financial condition worsened. Finally, the file was reviewed by a negotiator for Chase who asked for a $1,500 contribution from John in order to submit the file for approval. In response, we submitted John?s latest financial statements showing he did not have $1,500. The negotiator for Chase said with the new information there was no need for him to make a cash contribution. She submitted the file to the investor who approved the short sale. Chase has good quality negotiators but a slow system for reviewing short sales, so the delay problem is not the people but it is their process.
Then, the file was submitted to the mortgage insurance company. Their review stated that John would have to make a cash contribution of $9,500. You have to enjoy their logic, since he could not afford $1,500 then he could afford $9,500. They would take the $9,500 on a note over several years, but that made payments that John could not afford. So, we took up a collection among everybody involved and raised $4,000 with the buyer, seller and Realtors all throwing in some money. We offered that to the mortgage insurance company. Most financial analysts would prefer guaranteed cash at closing to the hope that an unsecured note would be fully paid by a borrower who is broke. The mortgage insurance company refused the offer. At first, they said the $9,500 was non-negotiable, regardless of whether the payment was cash or a note. Anyone who buys and sells notes knows that makes no sense, notes are sold way below the face value for cash.
We took up another collection and increased our offer to $5,500. I will spare you the details, but after much gnashing of teeth, we got it approved by decreasing the amount
The process took so long that Chase started a foreclosure proceeding. When the foreclosure notice hits the front door, the tenants stop paying the rent. So, John was in even bigger trouble. We got the tenant out, but the security deposit was depleted before it could be used to fix the damage done by the tenant. So, we had a buyer who had been forced to pay top dollar for this unit. When he did an inspection, he got a discount inspector who wrote up all sorts of items to try to show that he was as good as the inspectors who charged the market rate. Some of the items I could get fixed under the home warranty that I put on the property. But, others were not covered. For example, the report said the sink in the hall bath did not work. I ran it and it worked fine. In short, the buyer believed that the cost of the repairs justified a $5,000 reduction in the price. That would not work for Chase, the investor and the mortgage insurance company. The investor would take less, but the mortgage insurance company would not budge. So, the buyer walked.
I found a first time homebuyer who really wanted this one bedroom condo, because he could buy it for around $70,000. It was in the Brier Creek area, a prestigious section of Raleigh normally associated with an Arnold Palmer golf course community, fine restaurants and quality shopping. My team cleaned and repaired it with our own hands. We fixed everything that could be fixed under the warranty. The buyer?s girlfriend loved it. His mother wanted him to hold out for a better deal, but went along with the program when we showed her all the numbers. The buyer got his father to co-sign on the loan. My team resubmitted the short sale with the new buyer.
It took a great deal of re-structuring of the short sale proposal to get the numbers to work out so that the mortgage insurance company would get its $5,500. The proposal was explained in detail in an email directly to the negotiator, with less to the investor and more to the mortgage insurance company. However, there is only one way that Chase allows for a review of the short sale, so the approval we got did not match the structure of the sale that we submitted. In short, we needed even more money.
In the meantime, the actual sale date for the foreclosure was set. Freddie Mac, the investor that owned the loan, was tired of postponing the sale. The buyer called Chase and talked to everone he could. I called several levels of reviewers at Chase. I work regularly with the law firm that was handling the foreclosure and got the managing partner to assist in requesting that the sale be postponed. The sale was set for Monday. Friday afternoon, Freddie Mac refused to postpone the sale.
Monday morning, the effort started all over. We had to accept the short sale approval from Chase even though it took more money, because there was no way to postpone the foreclosure without the promise that the approved short sale would be completed and closed soon. With a little over an hour to spare, Freddie Mac allowed the sale to be postponed, authorizing a delay of 45 days. Forty five days is plenty of time to get a loan, so I had nothing to sweat about, right? Wrong
The notice from the law firm postponed the sale about 20 days. Can you say heart failure? North Carolina?s foreclosure procedure allows a sale to be postponed only so long without re-publication and certain other procedures that require a payment of several hundred dollars. Twenty days was all they had left. I tried to get the buyer?s lender to be ready to close before that sale date. When she sent out a series of emails asking for unnecessary items and misunderstanding the terms of the transaction, I knew that was not going to happen. This conclusion was reinforced when she did not return any of my phone calls. Unfortunately, the buyer had gone with a person at BB & T who was recommended by a friend instead of the person I recommended who had previously done several of the complicated loans that this condo complex requires. The buyer was fabulous, he would drop everything and deliver documents, pay stubs and anything else the lender wanted along with pies and gifts to encourage the lender?s team to hurry things along. If you want to see him, look at the video on the Buyer tab of the CreateAShortSale.com website.
Thank goodness Chase managed to get the additional payment to the foreclosure lawyers approved and the foreclosure sale postponed again. There is one positive result from this experience. I get to return the favor to that lender at BB & T by not returning her calls when she tries to get more business from my team. The other lender I recommend at BB & T has closed several more loans at this complex, so ?what goes around comes around?.
We have a short sale approval. We have a foreclosure delayed. We have the buyer?s loan approved. All we lack is enough money to close the sale because I know we cannot go back to Chase and the mortgage insurance company to get a revised approval. Everyone else was pushed to the limit, so I covered the rest of it. The other choice was to sacrifice John to a foreclosure and the first time homebuyer would not get the home he and his girlfriend loved. That choice would pay me nothing, get me no referrals and it would not help me stop the foreclosures in that neighborhood.
So, the sale closed, I made a little money, John was rescued and the buyer has become one of my strongest supporters and his mother loves me. My wife and I are going to his new home to have dinner with the entire family just as soon as he finishes the repairs. If we did not have a slow review by Chase and unreasonable requirements by the mortgage insurance company, I would have closed this sale more easily and made a much larger commission. However, I would not have this new client who is a raving fan of my team.