It’s not too often that an original idea arises in real estate, especially one with obvious benefits for borrowers but now such a thought has emerged, one which may save a lot of homeowners from foreclosure.
Most home buyers — especially first-time purchasers — lack the cash needed to purchase with at least 20 percent down plus closing costs. Lenders see such borrowers as desirable but risky, so to reduce risk they require borrowers with little down to get mortgage insurance, usually through such providers as the VA, FHA or private mortgage insurance companies. The industry says that in 2014 private mortgage insurance companies provided coverage for home loans worth $167 billion, almost 15 percent of all mortgage originations.
If you buy auto insurance you get to pick the insurer and you can shop for plans and rates, but private mortgage insurance — known as “MI” — is not purchased by borrowers, there’s no such thing as consumer shopping. Instead, the particular plan and private company picked to insure a mortgage is selected by the lender and paid for by the borrower. The interesting result is that if you’re in the business of selling private mortgage insurance your market is lenders and not the people who actually pay your premiums.
Mortgage insurance providers are “monoline” companies, a fancy expression which means they sell only one product. Carefully regulated by the states and required to maintain hefty reserves, MI companies pay lender claims up to policy limits if a home goes to foreclosure. Since 2008 and the mortgage meltdown, MI companies have paid out claims worth $44 billion.
More importantly — at least for borrowers — MI companies often prevent foreclosures with so-called “claim advance” plans. With such programs the insurance company helps a borrower with temporary financial problems by bringing the loan current, paying down the interest rate and sometimes both.
Why would an insurance company help a failing borrower? A claim advance may help a borrower keep the house and that’s a smaller cost to the insurance company when compared with a full-blown foreclosure claim. If the effort to help the borrower is not successful and the property is foreclosed, the claim advance is deducted from any amounts needed to settle a lender claim.
All of which brings us to a new and clever idea: Mortgage insurance with a twist, the “twist” in this case being unemployment insurance packaged with mortgage insurance to create a two-for-one combo package no additional cost to the borrower.
This is a very big deal because the economy remains wobbly for millions of Americans. The latest figures from the Bureau of Labor Statistics show that in March the unemployment rate was a comfortable 5.5 percent, well below the 10 percent seen in 2009. However, the published unemployment rate doesn’t tell the whole story: In March the BLS says 8.6 million people were officially unemployed but that number doesn’t include another 2.1 million people who were “marginally attached to the labor force.” The marginally attached are not counted as unemployed “because they had not searched for work in the 4 weeks preceding the survey.”
The bottom line is that a lot of people are looking for work, including individuals who surely did not expect to have such problems when they bought the home where they now live.
Unemployment has a way of being very inconvenient, especially when it’s time to pay the mortgage but the Radian Group, a private mortgage insurance company, says it will start offering unemployment insurance for new mortgage borrowers as of May 15th.
Under Radian’s program, a borrower can receive as much as $9,000 in mortgage assistance. As the company explains, the coverage includes:
“Up to six monthly mortgage payments, not required to be consecutive.”
“A maximum monthly benefit of up to $1,500.”
“Total protection of up to $9,000 during coverage period.”
“Two years of coverage beginning on loan closing date.”
The program does not cover the self-employed and the job loss must be involuntary.
There’s no additional cost to the borrower, so the program essentially combines mortgage insurance with unemployment insurance. The money provided under the program goes toward the monthly mortgage payment, meaning mortgage principal, interest, taxes, and insurance and not just principal and interest. This is important because it prevents borrowers from getting behind on taxes and insurance, expenses which if left unpaid can lead to foreclosure just as surely as a failure to pay the lender.
Money received under the plan is insurance and not a loan so it does not have to be repaid.
Okay, but is the money paid out a “claim advance?”
According to Emily Riley, Radian’s senior vice president for corporate communication, this “is not a claim advance. It is a direct payment to the mortgage servicer for the mortgage payment up to $ 1,500 per month for six months. This does not have any effect on a mortgage insurance claim filed in the event of default.”
One of the problems faced by mortgage insurance companies is that they all offer one thing and that one thing is the same thing: mortgage insurance. How does a company stand out in such a marketplace?
Riley says Radian hopes the unemployment insurance plan will attract more loans from lenders with the high loan-to-value mortgages widely used by first-time borrowers. Also, the idea is to help lenders offer an alternative to FHA financing.
From the borrowers’ perspective, the mechanics of mortgages and mortgage insurance are fairly opaque. Most borrowers are happy if they simply can get a loan, the lower the cost the better. If it happens that included in required MI coverage is unemployment insurance worth as much as $9,000 — enough in some cases to be the difference between ownership and foreclosure —then that’s a very nice addition.
For lenders — and remember lenders are the folks who actually buy MI coverage — unemployment insurance is a very attractive idea, one more defense in a risk-adverse industry that dearly wants to prevent more trips to the financial hell of failures, loan buy-backs and foreclosures. For this reason look for the idea of free unemployment insurance to spread, if only because it makes too much sense to ignore.
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