PMI is a Scam... Market Opportunity for an Alternative?

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So, I find myself sitting around thinking about PMI (well, mortgage insurance, in general) from time to time and how big of a sham it seems to be.  As a borrower, you are paying for insurance that really only benefits others.  Sure, it allows you to get a loan with less equity, but couldn't a different insurance product offset the risk in a near equal way and actually provide benefits to the homeowner?

I get offers all of the time for life insurance for my mortgage that will pay it off in the event of my demise and also will pay my mortgage payments for six months if I lose my job.  For a $130k mortage, I could get that for $11/month, but my PMI (at the time, was $50/month).  So what about a product that might save a little money, say $35/month, in that case, that provides better coverage than that?  You save $15/month and you, as the homeowner, gain additional benefits by having insurance that helps YOU instead of paying for something that doesn't really benefit you?  Then, have the risk analysis in such a way that it eliminates the need for PMI?  I think that there is a market for such a thing and people could continue keep such things beyond 20% equity (I think many would just because they would forget, and others would keep it because they like it).

I am not much of an insurance person (I don't know backend calculations for risk, etc, used by the insurance industry), but some product could certainly fill this gap.  Does it seem feasible?

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What alternative product would you offer that is not already there?

First, we already have a couple alternatives to PMI (... (more)

LordKronos (Nov. 17, 2015 @ 9:19p) |

Sure it is feasible. Put 20% down. If you are able to earn more on that 20% elsewhere, then you wouldn't complain about ... (more)

blueiedgod (Nov. 18, 2015 @ 8:48a) |

PMI is a good thing. It shifts the cost of defaults to the most risky borrowers, instead of spreading it out to all mort... (more)

crazytexan (Nov. 30, 2015 @ 3:59p) |

Sorry I turned the pmi is a scam thread into how can we make pmi more of a scam and make money off it. 
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The chances of a borrower failing to pay their mortgage are significantly higher than dying.  That's why PMI costs more than life insurance.

dcwilbur said:   The chances of a borrower failing to pay their mortgage are significantly higher than dying.  That's why PMI costs more than life insurance.
  I understand that, that is not the point.  That life insurance also offers to pay mortgage payments for six months due to job loss.  So, coming up with a product that is more expensive (but less than PMI) seems reasonable.

There's a fair amount of competition in the private mortgage arena - Genworth, AIG, MGIC, Radian and others.  Maybe I'm not understanding your proposal, but I'm not sure how you would go about undercutting the big boys.  Even if you could sell a product that pays in the event of death or job loss, that wouldn't mitigate all the other risks of default that the lender is protected from with PMI.

dcwilbur said:   There's a fair amount of competition in the private mortgage arena - Genworth, AIG, MGIC, Radian and others.  Maybe I'm not understanding your proposal, but I'm not sure how you would go about undercutting the big boys.  Even if you could sell a product that pays in the event of death or job loss, that wouldn't mitigate all the other risks of default that the lender is protected from with PMI.
  I would say that I don't fully understand it, but I think that the existing market is lop-sided.  The lender is getting protection that the borrower is paying for.  Why not an option that the borrower can pay for that benefits the borrower?  Let's take price out of the picture... forget undercutting the existing players.  What about a product that shifts the beneficiary?  Help the borrower to make good on their loan by providing temporary benefits, up to six months at a time within some reasonable window of time (say 18 months, or 24 months, whatever).  And as long as the cost diminished as the outstanding principle declines, I could see many borrowers keeping it longer than the 20% equity mark.

The bank wants protection for the holding and disposition costs on a default.  Lowering the risk of a default by providing additional benefits seems like it should cover that, at least in part.  Perhaps mitigate it by not doing 0% down, but at least 5% down (or 10%).

Dus10 said:    What about a product that shifts the beneficiary?  Help the borrower to make good on their loan by providing temporary benefits
Because borrowers don't always do the right thing and might go into bankruptcy mode and the bank gets nothing. Better to have the insurance pay them directly and bypass borrower shenanigans.

I'm oversimplifying, but PMI is basically "deadbeat insurance."  The borrower has so little equity in the property that the bank requires him to purchase "deadbeat insurance" so that the bank is made whole in the event of default, because the bank knows that in a pool of individuals with little down-payment, there are more deadbeats than in a pool of of borrowers that have skin in the game.

If the benefit of being a deadbeat accrued to the individual instead of the bank, everybody would be a deadbeat (and the seller of deadbeat insurance would go broke).  Because the borrower gets nothing is exactly why PMI works (and is relatively cheap, all things considered).
 

I am not an insurance guy either. But instead of thinking that the PMI rate should be lower, perhaps it would help to think that there should be enough downpayment before purchasing a house? I understand the lender's rational for PMI which is for lender protection. I believe that all these problems would go away if you don't buy a house without enough downpayment. From my (home buyer) perspective, PMI is just another ripoff way to remind people that they should delay home purchase if they don't even have the downpayment for it.

dcwilbur said:   The chances of a borrower failing to pay their mortgage are significantly higher than dying.  That's why PMI costs more than life insurance.

Sorry to say, one's chance of dying is 100%.

The bank is going to want the mortgage insurance in place no matter if there is some other kind of short term income replacement insurance in place, because they don't want to be left holding the bag when the short term runs out.

There isn't any reason to incentivize the borrower because they don't own anything when they still have an outstanding mortgage. If you do somehow incentivize the borrower to make a claim then the risk and therefore the price has to go up.

The borrower had so little equity when required to have pmi that there isn't any reason for them to insure anything (except maybe their emotional attachment to their home). Pmi is more of a deadbeat fee than an actual insurance policy for the borrower as noted above.

PMI / Mortgage insurance is specifically not for your benefit (as products labeled with "insurance" usually are). Really you are paying for the mortgage lenders benefit (it's their insurance, they gets paid, not you, upon a default).

They might as well just call it a mortgage service fee or something, because that's what it basically is.

dcwilbur said:   I'm oversimplifying, but PMI is basically "deadbeat insurance."  The borrower has so little equity in the property that the bank requires him to purchase "deadbeat insurance" so that the bank is made whole in the event of default, because the bank knows that in a pool of individuals with little down-payment, there are more deadbeats than in a pool of of borrowers that have skin in the game.
(Agreeing with dcwilbur)  Usually it's really even 0% equity or negative equity after inflated transaction costs.  The PMI pays to cover default risk of the essentially unsecured portion of the loan.

If it's 0% equity (90%+ LTV and closing costs+Realtor fees), any movement down in the market price (even 1%) or damage caused by the "owner" results in an underwater property.  If it's a 95%, 97% 100% LTV financing then it automatically starts off with a large unsecured loan even ignoring the other possible negative events.

IMO, it's much more productive to whine about the "Scam" realtor and title company fees.  Rarely are the realtors worth 6% of a transaction price worth many years of the average buyer's income.  Some states regulate title "insurance" fees, forcing them to be high (like TX, at 85% mandated commission to the title agent and 15% to the actual title insurance), and then buyers generally are forced to go with the listing agent's buddy and the title co's refuse to disclose their additional nonsense fees at all before closing because no one makes them do it and they benefit by non-disclosure of their fees and less questions asked about what they actually are supposed to do for their high fees.   $1000s+ to shuffle around a small stack of papers.  Just nonsense!  Look for and support political candidates who will do things to break the Realtor cartels and the title co's scumbag business models.

If the scam realtor and title company fees were minimized, this might eliminate much of the need for PMI because the mortgages wouldn't all be originated for more than the actual property value.

An alternative to PMI for the borrow is to do an 80/10/10 or 80/15/5 loan where they get a 2nd loan at a higher interest rate.

PMI basically just lets the borrower buy with a lower down payment. 2nd loans also do the same thing but at the cost of higher interest on the secondary loans.

Dus10 said:   That life insurance also offers to pay mortgage payments for six months due to job loss.
  
Type in the exclusions on that coverage. I bet it doesn't really provide as much coverage as you think.

So, I think that the point is being missed. I understand what PMI is, why it exists, and why lenders require it. The point is that I think there is a market for something else, an opportunity. Obviously, one could have a larger downpayment and avoid PMI, that isn't the point. Mortgages with little to no downpayment are here and don't seem to be going anywhere anytime soon. Real estate agents like it, mortgage brokers like it, home builders like it, home sellers like it, and home buyers like it. And with interest rate as low as they are, paying PMI is not the worst thing in the world, but it could be better. If given the choice between paying PMI that benefits the lender and another product that provides some assurance against the risk and benefits you, would you not choose the product that provides you with more benefit?

Dus10 said:   If given the choice between paying PMI that benefits the lender and another product that provides some assurance against the risk and benefits you, would you not choose the product that provides you with more benefit?
  Can you explain exactly what benefit that the payer should get?
Perhaps, something like how Allstate offers you a $X "safe-driving" check every year you don't use your insurance, and bakes that $X into the premium?
If you pay me a $125 annual premium, I'll be happy to send you a $100 annual gift card on the years you pay your mortgage on time.
There are excellent opportunities to self-insure for this too.

Without PMI you either wouldn't get the loan without a 20% downpayment, or you would get 100% financing at a punitive APR.

At first, I thought the OP was just confused then on 2nd thought, I realized there is an opportunity. It's all in the marketing to the financially ignorant.

OP already got a great tag line, "only fools pays for PMI", "with only $XX more a month, you are paying to help YOURSELF instead of the big bankers!"

All one have to do is package a PMI with a crappy life life insurance, oh I almost forgot, wrapped it all up in a MLM outfit.

#WINNER#

Dus10 said:   So, I think that the point is being missed...If given the choice between paying PMI that benefits the lender and another product that provides some assurance against the risk and benefits you, would you not choose the product that provides you with more benefit?
 

I'm definitely missing the point. You can already buy life insurance, but how does that protect the lender if you just walk out?  What kind of product would protect the lender's interest better/cheaper than PMI?  What "benefit" would accrue to the individual?   

Dus10 said:   So, I think that the point is being missed. I understand what PMI is, why it exists, and why lenders require it. 
If you don't want people to misinterpret your point, try not to use such clickbait titles.
Scam (noun) a ​dishonest or ​illegal ​plan or ​activity, especially one for making ​money


So PMI does not fit the definition of scam. You might argue it is overpriced, but I'm willing to bet any product that is invented by the financial services industry to "improve" PMI is going to be a far worse deal.

I think the OP is assuming he would buy some sort of insurance ("Dus10 Insurance") that paid him in the event he lost his job or got sick or otherwise couldn't pay his mortgage, and he would use some or all of that payout to keep paying his mortgage. Everybody wins!

The problem is, lots of people would waste their money, not be able to pay their mortgage, collect their Dus10 Insurance, then waste that on more H&B, and still not pay their mortgage. So how does that protect the lender against deadbeats?

It also sounds like probably you are NOT a deadbeat, but are being lumped in a risk pool (those with less than 20% down) with lots of deadbeats. Sorry. The only real solution is to get out of that pool.

AlwaysWrite said:   I think the OP is assuming he would buy some sort of insurance ("Dus10 Insurance") that paid him in the event he lost his job or got sick or otherwise couldn't pay his mortgage, and he would use some or all of that payout to keep paying his mortgage. Everybody wins!

The problem is, lots of people would waste their money, not be able to pay their mortgage, collect their Dus10 Insurance, then waste that on more H&B, and still not pay their mortgage. So how does that protect the lender against deadbeats?

It also sounds like probably you are NOT a deadbeat, but are being lumped in a risk pool (those with less than 20% down) with lots of deadbeats. Sorry. The only real solution is to get out of that pool.

  Have it paid directly to the lender, that simplifies the solution.

Sure, there are situations where it isn't covered, but there are are two guarantees in life... death and taxes.  PMI doesn't fix everything for the lenders, it merely makes the risk more tolerable.

Dus10 said:   
AlwaysWrite said:   I think the OP is assuming he would buy some sort of insurance ("Dus10 Insurance") that paid him in the event he lost his job or got sick or otherwise couldn't pay his mortgage, and he would use some or all of that payout to keep paying his mortgage. Everybody wins!

The problem is, lots of people would waste their money, not be able to pay their mortgage, collect their Dus10 Insurance, then waste that on more H&B, and still not pay their mortgage. So how does that protect the lender against deadbeats?

It also sounds like probably you are NOT a deadbeat, but are being lumped in a risk pool (those with less than 20% down) with lots of deadbeats. Sorry. The only real solution is to get out of that pool.

  Have it paid directly to the lender, that simplifies the solution.


 

Then what is the benefit to the individual, and how is this different from existing PMI? 

What if you offered a PMI product that was like return-of-premium life insurance? Charge a higher premium but once you reach 20% equity and 7 years (or whatever), you get a check for the premiums you've paid. Most of us realize that this is not a good deal for the consumer, but might be very desirable for the type of person that requires PMI.

burgerwars said:   
dcwilbur said:   The chances of a borrower failing to pay their mortgage are significantly higher than dying.  That's why PMI costs more than life insurance.

Sorry to say, one's chance of dying is 100%.

  Obviously you're being funny, but the chance of dying during the term of the loan vs. failing to pay their mortgage during the term of the loan(s).

doveroftke said:   What if you offered a PMI product that was like return-of-premium life insurance? Charge a higher premium but once you reach 20% equity and 7 years (or whatever), you get a check for the premiums you've paid. Most of us realize that this is not a good deal for the consumer, but might be very desirable for the type of person that requires PMI.
  The insurer needs to cover risk of default; so the non defaulters need to pay for those who default. If the non defaulters get their money back, then the only way that the insurer can extract money is off the investment gains of the premiums before it's refunded. So, to provide enough to cover the default loss with only investment gains, PMI premiums would need to go way up. like 10x (probably more).

That option certainly wouldn't appeal to me. On the other hand, I would only take a mortgage if I had enough equity so that there was no PMI.

Another key point is that since PMI protects the lender, then any alternative insurance product would have to be accepted by the lender. Even if the life insurance that pays the mortgage in case of job loss was really great and paid the mortgage in case of any reason, the bank could still say no we don't accept that. Their money, their rules.

However, +1 to OP for trying to think outside the box, identifying a need and then trying to fix it. This is how many new business disrupt crappy industries.

OP, I am very confused. If you offered this alternative insurance that pays the borrower if he defaults, the lender will still require PMI. I'm sure you could come up with some AFLAC-type product (they have lots of different things you can get "insurance" for). But, why would a homeowner want to pay a lender PMI and you for your insurance unless he is fairly certain he will default?

dcwilbur said:   
Dus10 said:   
AlwaysWrite said:   I think the OP is assuming he would buy some sort of insurance ("Dus10 Insurance") that paid him in the event he lost his job or got sick or otherwise couldn't pay his mortgage, and he would use some or all of that payout to keep paying his mortgage. Everybody wins!

The problem is, lots of people would waste their money, not be able to pay their mortgage, collect their Dus10 Insurance, then waste that on more H&B, and still not pay their mortgage. So how does that protect the lender against deadbeats?

It also sounds like probably you are NOT a deadbeat, but are being lumped in a risk pool (those with less than 20% down) with lots of deadbeats. Sorry. The only real solution is to get out of that pool.

  Have it paid directly to the lender, that simplifies the solution.


 

Then what is the benefit to the individual, and how is this different from existing PMI? 

  Because the borrower gets their mortgage paid and doesn't have a late/missing payment?  Seems simple to me.

RidicuRuss said:   Another key point is that since PMI protects the lender, then any alternative insurance product would have to be accepted by the lender. Even if the life insurance that pays the mortgage in case of job loss was really great and paid the mortgage in case of any reason, the bank could still say no we don't accept that. Their money, their rules.

However, +1 to OP for trying to think outside the box, identifying a need and then trying to fix it. This is how many new business disrupt crappy industries.

  I agree, it would require the lender to accept it.  But, lenders already accept workarounds with piggyback loans and such.

Yeah I think the moneymaking idea here is pmi+ which is the same as existing pmi but offers some kind of benefit to the borrower (limited mortgage payment assistance in the event of job loss, disability, etc).

You charge more than pmi of course, but you get in bed with the banks or whoever is putting the pmi on the loan to begin with and give them a kickback to upsell this as "for a few more bucks a month instead of just worthless pmi you get that in addition to this other value add because we are looking out for you and want you to keep your house"

Theoretically this limits defaults? (Mortgage payment replacement goes straight to the bank so the borrower can't spend it on other stuff while unemployed), Which limits loss payments on the actual defaults and maybe pays for the program. A lot more data and analysis would be needed to see if the numbers work out

Maybe you even work it out with the Lien holder that in the event this temp insurance kicks in they scale back to a principal only payment that they receive to keep the loan in good standing. This way if they eventually default you haven't paid any extra (because principal payments reduce the mortgage balance that the pmi has to eventually pay). And if the borrower ends up recovering then the accrued interest is tacked onto the loan somehow.

This should be an easy upsell because majority of pmi payers are already bad with money and will pay the extra dollars for month for something they think benefits them because they get to keep their house that they have no equity in but an emotional attachment to.

Sorry I turned the pmi is a scam thread into how can we make pmi more of a scam and make money off it.

I'm gonna go call wells Fargo and see what they think

zonacat said:   Sorry I turned the pmi is a scam thread into how can we make pmi more of a scam and make money off it.
 

  That was ultimately my point... it seems like there is a market opportunity.  How do we address it?

What alternative product would you offer that is not already there?

First, we already have a couple alternatives to PMI (other than 20% down): 80-20 loan, and PMI-free 95% loan. Both have some advantages and disadvantages vs PMI.

If you are going to focus on a PMI product, then first and foremost, you need to offer the same guarantees that PMI offers. Lenders are going to demand it. Whatever extra nice features you might throw on top of it, you've first got to meet that baseline. So the only possible way to make that part more attractive is to compete on price. Are you able to do that? What makes you think you can undercut the big players that are already doing this? Perhaps it might look like they are reaping massive profit and you can just take a smaller profit, but are you sure you can do that and still survive any market downturns when people start defaulting left and right? It's certainly possible, but it seems like a bit of a long shot (with a lot of uncertainty) on this one.

So if you can't compete on the base product, then you want to compete with extra offering on top? Well, two problems with that.

1) We already have all these offering. If you buy a house, you get bombarded with mail offering all sorts of "value" added services. Everything from bi-weekly payment offers to life insurance designed to pay off your mortgage. Most of these are garbage offers, designed to ring money out of you while offering a service you could already get for free/cheaper. So perhaps you could offer a product that is the same but cheaper...ie: less of a scam. But in the end, it is still a scam for the customer, unless you offer one of the legit services, in which case, we come back to the same question as earlier...what makes you think you can undercut the big players?

2) The previously mentioned products are all add-ons. You could bundle them with you PMI, and maybe your angle there is that you reduce the cost because both products come from the same provider, thus there's only one extra company skimming off profits. However, then you run into a competativeness issue. I think we've already established you are unlikely to be able to offer the base PMI package cheaper, so when you bundle these add-ons with your PMI, the inevitable outcome is that you will be charging more than the basic PMI packages. The problem there becomes, users don't go out and shop their own PMI. They don't even care about PMI beyond the fact that it is a necessary evil for their low downpayment loan. So when lenders are trying to be competative, choosing your PMI+something product is going to put the lender at a competative disadvantage. The lenders could say "but our PMI product has these advantages..." but you know that's going to fall on deaf ears 99% of the time.

So if you can't improve on the base product, and you can't realistically compete by bundling them, what real value do you offer?

There's one thing that particularly bugs me about PMI. The rate you are charged for PMI is risk based. If you only put down 5%, you are a higher risk than someone putting down 15%. Yet once you pay your 95% loan down to 85%, you still pay the same PMI rate you payed when you started. Your risk has decreased, but your payment for the risk hasn't changed. So you could offer a product that addresses that issue. The problem with that, however, is that when it comes down to it, your expenses to cover defaulted loans is still the same. Thus you've got to collect the same amount of money in the end. However, if you are now collecting less money from the group that has paid down an additional 5-10% since they took out the mortgage, then to make up for it, you've got to increase the amount people pay at the beginning, when they only have 5% down. The problem there is, that's the time when people are shopping for loan, and they aren't caring about the fine points of your PMI...merely what their immediate monthly payment will be. So again, you run into the competativeness issue.

I think most everything comes back to that same pair of issues: customer don't care about the details, so most anything you do to set your product apart will put you at a competative disadvantage in the market.

Dus10 said:   

I am not much of an insurance person (I don't know backend calculations for risk, etc, used by the insurance industry), but some product could certainly fill this gap.  Does it seem feasible?

  

Sure it is feasible. Put 20% down. If you are able to earn more on that 20% elsewhere, then you wouldn't complain about the cost of avoiding putting that 20% down. 

20% of a $130K purchase is $26,000... you can't really earn much on a $26,000 investment in 5 or so years that it would take you to get under the PMI threshold. 

PMI is a good thing. It shifts the cost of defaults to the most risky borrowers, instead of spreading it out to all mortgage holders with higher APYs.

That being said, your proposal is basically just unemployment insurance, plus life insurance. Also, with how subsidized PMI is, you won't be able to beat it without government subsidies. The cost of PMI is already lower than it's actual cost to the PMI issuer (I believe).



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