Chapter 14 Mortgage Default Insurance, Foreclosure, and Title Insurance © OnCourse Learning

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 2 © OnCourse Learning

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 3 © OnCourse Learning

Government-Sponsored Insurance  FHA Insurance – full insurance program  VA Insurance – partial insurance program 4 © OnCourse Learning

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 5 © OnCourse Learning

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 6 © OnCourse Learning

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 7 © OnCourse Learning

FHA Loan Limits  $271,050One unit property  $347,000Two unit property  $419,425Three unit property  $521,250Four unit property 8 © OnCourse Learning

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 9 © OnCourse Learning

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 10 © OnCourse Learning

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%) 11 © OnCourse Learning

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. 12 © OnCourse Learning

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% Loan2%  >90%- 95%Loan1.50%  90% or LessLoan1.25%  Fee is waived for service related disability 13 © OnCourse Learning

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, © OnCourse Learning

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 15 © OnCourse Learning

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 16 © OnCourse Learning

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 17 © OnCourse Learning

PMI  Some borrowers do “ Piggyback” loans called s to avoid PMI  80%First Mortgage  10%Second Mortgage  10%Down Payment 18 © OnCourse Learning

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 19 © OnCourse Learning

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 20 © OnCourse Learning