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Hey, weren't those mortgages supposed to be insured?

Now that the economic downturn is officially a recession, can we go back to the subprime mortgage crisis that started it all and ask the obvious question: Shouldn't all those high-risk loans gone bad have been covered by private mortgage insurance?

Yes, if all the high-risk borrowers and their lenders had been playing by the rules. But they weren't.

"Exactly. They weren't insured," Jeff Lubar of the Mortgage Insurance Companies of America said from Washington on Friday in response to my is-it-me-or-is-the-rest-of-the-world-crazy question.

As most first-time homebuyers know, PMI is a policy lenders will make you buy if you don't put down enough money -- usually 20 percent -- on your home. The purpose is to insure the loan in case you default.

My wife and I had to pay it on our previous home in Massachusetts and assumed we'd have to do the same when buying a house here. But to our surprise, our mortgage broker said no, we didn't. The trick (he didn't exactly call it that) was that the 10 percent we planned to put down would instantly establish 10 percent equity in the home. That meant we could qualify for a home equity loan for an equal amount, bringing us up to 20 percent and Voila! No PMI required.

Curiously, the home equity loan (with an interest rate at about 8 percent) was offered by the same company that granted the first mortgage on the home. If that's confusing, put it this way: The mortgage company providing the primary loan on the house was offering us a second loan that we would hand right back to them to prove, with their money, that we weren't a credit risk.

"OK," I said, and we shrugged it off, thinking they were doing it because we had very good credit and because we planned to sell the Massachusetts house anyway. We did, and did well on the sale, and immediately paid off the second mortgage that we called "the stupid loan."

But in fact, the deal had nothing to do with our ability to pay. Thousands (millions?) of subprime borrowers were doing the same thing, including those who checked the "no-income-verification" box on their loan applications. Some even bought houses with zero down and still got home equity loans to avoid PMI.

So should I have been flabbergasted when the housing crisis hit and our mortgage company wound up in the center of it?

"They made more money on it," Lubar said of the lenders who concocted the scheme. "The underlying premise of all of this was that the market would continue to expand and prices would keep rising." As we all know now, instead the bubble burst.

Some of the prey is as much to blame as the predators. In researching this column, I came across a financial writer's advice to a California couple with a $415,000 first mortgage (at 5.75 percent) and a $163,000 second mortgage (at 9 percent) taken out to avoid PMI. Big shocker: They can't pay.

The writer's advice? "Go to the lender of the second [loan] and try to renegotiate terms, taking advantage of any government relief." In other words, make us all pay.

The best part, though, is the mailing I received last week from my mortgage company, which was one of the first recipients of the government bailout. It offered a lower interest rate on our home equity loan that's long paid off.

They still haven't learned, but don't blame PMI.