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Most PMI policies will payout claims to their insured (the lender) in a lump-sum, post foreclosure.
The polices typically cover/reimburse a fraction of the outstanding loan balance (say 30%-40%) PLUS associated expenses and carrying costs the lender incurred during the foreclosure process.
Here is scenario to consider:
Let's say a borrower buys a house @ $600k with only 10% down (90% LTV, initial loan balance of $540k, requiring PMI). He then defaults on it 2 years later with an outstanding balance remaining of $520k.
The foreclosure process takes 6 months. It is now an underwater asset and goes back to the bank at the trustee sale. The PMI company pays out a claim of 40% of the outstanding balance to the lender which comes out to $208k, plus all of the carrying costs and legal fees associated with it during the 6 month foreclosure process. Let's just call that an extra $32k, for a nice round total claim payout amount of $240k.
The lender retains title to the property and liquidates it via REO disposition, netting $440k after paying listing/selling fees.
That is a total net to the lender of $680K for something that only cost them $540k to begin with. Nevermind the government subsidies, or any tax deductions the lender enjoys from the associated "losses" from foreclosure.
That may be an extreme example, but scenarios like the one above demonstrate how America got (and is still getting) screwed by institutional lenders, PMI, and the goons on Wall St. that sling the securities in which they are pooled. Just my $.02.
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