Chapter 14

Mortgage Default Insurance, Foreclosure, and Title Insurance

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Chapter 14 Learning Objectives

Understand how each of the three different default insurance plans – VA, FHA, and private mortgage insurance (PMI) – operate

Distinguish between partial insurance, full insurance, and co-insurance

Understand how state foreclosure laws differ

Understand the economics of the title insurance industry

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Mortgage Default Insurance

Partial Coverage – covers losses up to a certain percentage of the original amount of the loan

Full Coverage – all lender losses are covered

Self-Insurance – lenders absorb the default risk themselves

Co-insurance – all losses up to a certain portion of the loan are covered

Government-Sponsored Insurance FHA Insurance – full insurance program VA Insurance – partial insurance program

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FHA Loans

U.S. citizenship not required. House must be in the U.S. and must be a principal residence

High-cost area limits may be adjusted up to 150% of loan limits to a maximum of $1,094,625

For non-high-cost areas, the limit is 48% of the FHLMC conforming loan limits

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FHA Reverse Mortgages Borrower requirements:

62 years old Own the property Occupy as principal residence Participate in consumer information session

Max loan amount is $200,160 No income and credit qualification No repayment as long as you occupy the house Borrower pays insurance premium 2% up-front premium and 0.5% on the outstanding balance

annually

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FHA Loans: Determining The Loan Amount Price $50,000 or Less: 98.75% of the appraised value or sale price

whichever is less

Price > $50,000: 97.75% of the lesser of appraised value or sale price

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FHA Loan Limits

$271,050 One unit property

$347,000 Two unit property

$419,425 Three unit property

$521,250 Four unit property

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FHA Loans – Loan Assumption

Prior to December 1, 1986 all FHA loans were simple (non-qualifying) assumptions

For loans originated after December 14, 1989 creditworthiness review required; assumption must be by an owner-occupant

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FHA Loans – Refinancing

Can be refinanced and cash can be obtained on owner-occupied properties up to 85% of the acquisition cost

FHA Streamline Refinance Plan (since March 1989) Less documentation

For very-high-rate mortgages (15% or more)

Refinancing costs included in the new loan

W/O appraisal if new loan amount is not more than old loan and no costs are added in

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FHA Loans – Mortgage Insurance Premium (MIP) Up-front payment plus an annual premium paid monthly

Starting April 2012 – up-front premium of 1.75%

Annual premium of 0.5% of the outstanding balance

Beginning April 2012 Annual premium for any loan with term greater than 15 years is 1.2% if the LTV >95%

Annual premium for 15-year loans is 0.35% (0.6%) if the LTV <90% (LTV>90%)

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FHA Loans – MIP Beginning in July 2008 FHA implemented a flexible

premium pricing schedule Up-front insurance premium ranges from 1.25% to 2.25%

depending on the riskiness of the borrowers

First time new borrowers can suspend the premium payment when the loan-to-value ratio reaches 78% of the original purchase price.

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VA Loans

Started in 1944

Provides mortgage loan guarantees for principal residences

Guarantees only a portion of the loan

No down payment may be required

Funding fee varies with down payment

>95%- 100% Loan 2%

>90%- 95% Loan 1.50%

90% or Less Loan 1.25%

Fee is waived for service related disability

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VA Loans

Must have eligibility and entitlement

Eligibility- Minimum active duty, 90 days for “ Hot War”

Basic Entitlement is $36,000

Additional entitlement up to 25% of Freddie Mac conforming loan limit

For 2008, conforming loan limit is $417,000

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VA Loans

Ginnie Mae requires a 25% guaranty

Not assumable since 1988

Entitlement restoration vs. release of liability

Follows HUD/FHA foreclosure procedure

Contract interest rate is not regulated

Offers ARMs TB Yield, 1/5 Caps, 2.00 Margin

VA will finance mobile homes

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Private Mortgage Insurance (PMI)

Private insurers

Insures top portion of loan

Pay claim and take title or just pay losses

Homeowners Protection Act Of 1998 requires lenders to cancel PMI automatically when L/V is 78%

After July 29, 1999 can be cancelled at 80% L/V of original property value

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PMI

Other requirements for cancellation: No payment more than 30 days late in last 12 months

No payment more than 60 days late in last 24 months

Property value has not declined

Protects conventional mortgages and cannot be required with 80% or less L/V ratio

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PMI

Some borrowers do “ Piggyback” loans called 80-10-10s to avoid PMI 80% First Mortgage

10% Second Mortgage

10% Down Payment

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Foreclosure Laws

Judicial Foreclosure Court judgment against borrower allowed in all states

Power of Sale Foreclosure proceeds without a court order Usually with the deed-of-trust

Equitable Right of Redemption Redeem the property before the sale

Statutory Right of Redemption Redeem the property after the sale

Deficiency Judgement

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Title Insurance

Unencumbered and clear title – free from restrictions by private parties

Title insurance Insures against the risk that clear title may not be transferred to the buyer

Does not insure from any loss due to government restriction of property rights (zoning or eminent domain)

Title Search The process that reviews each transfer of title throughout the history of the property