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CHAPTER 7
PRIVATE MORTGAGE INSURANCE
OBJECTIVES OF CHAPTER
Upon successful completion of this chapter, the students should be able to:
Identify factors contributing to the failure of mortgage
guarantee companies in the 1930s.
Discuss how PMI companies reappeared and why.
Understand why private mortgage insurance is so
important for residential mortgage lending.
Be able to compare PMI to Mortgage Insurance Premium
(MIP) for FHA mortgages.
Explain how mortgage insurance coverage is established.
Discuss how claims are handled by MI companies.
Review the increased risks for MI in today’s market
© Cengage Learning 2
I. Introduction
II. Why is Private Mortgage Insurance so
Important in Today’s Market?
A. Private Mortgage Insurance History and
Evolution
B. The Beginning
C. 1950s–1970s: The Rebirth of Private
Mortgage Insurance
D. The 1980s: Difficult Years
E. The 1990s: Golden Years?
F. 2000 and Beyond: The Best of Times, the
Worst of Times
III. How does PMI Work?
IV. Contracting with a Mortgage Insurance
Company
V. MI Coverage Amount
VI. Claims
VII. Pool Insurance
VIII. The MI Industry Today
A. Evolving MI Business
B. Loan Quality and Portfolio Risk
C. Financial Requirements and Strengths
IX. Types of Reserves
X. Types of Loans-Self Insurance?
Teaching Tips
Teaching Tips
PMI was one of the reasons purchasers were able to
purchase a home with a smaller downpayment.
Discuss how this was both good for the real estate
industry and bad for the mortgage industry.
The 80-10-10 was an alternative to PMI. How did
that hurt the PMI industry?
Do you think that the decrease in the number of
loans with PMI ultimately decreased the amount of
defaults, as far as the MI companies were
concerned?
Do you think that PMI company reserve levels
should be increased for the future?
What precautions can the MI industry take to
prevent huge defaults and payouts from happening
again?
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SUGGESTED TRUE/FALSE QUIZ
1. The first private mortgage insurance company was formed in
1959.
2. In the five years ending in 2010, private mortgage insurance has
insured twice the dollar amount of federal insurance/guarantee
programs combined.
3. During the 1980s mortgage insurance companies suffered
because of origination and servicing “irregularities”.
4. Fannie Mae and Freddie Mac require mortgage insurance (or
some other credit enhancement) if the LTV is over 80 percent.
5. States require that mortgage insurance companies have $5 of
capital for every $25 of risk they insure.
6. Pool insurance can be used for a group of mortgages even if the
LTV of these mortgages is over 80 percent.
7. In some situations a mortgage lender may grant a “piggyback”
loan that has a combined LTV of 95 percent and require no
mortgage insurance.
8. If a claim is submitted to a mortgage insurance company the MI
could pay off the claim and take title to the real estate.
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9. Mortgage insurance is good for the lender because it will last
the life of the loan.
10. If the LTV of a loan is 90 percent, Fannie Mae and Freddie Mac
requires mortgage insurance coverage to 60 percent.
MULTIPLE CHOICE QUESTIONS More than one answer may be
correct – select all correct answers. (Correct answers are
italicized.)
1. PMI stands for
d. Private Mortgage Insurance
2. The government equivalent of PMI is
a. An FHA mortgage
3. What was the downfall of PMI insurance after 2000?
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d. Lack of available funds for PMI companies
4. What type of risk is calculated into the PMI premium amount
a. Loan to value
5. What types of reserves must PMI companies maintain
a. Unearned premium
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ANSWERS TO ORAL DISCUSSION POINTS
The discussion points at the end of each chapter are intended for oral
discussion in class. Suggested answers/points to emphasize to the
questions are found below.
1. How is private mortgage insurance (PMI) different from government
insurance and guarantee programs?
ANSWER: Basically the federal government is not involved with private
mortgage insurance. MI companies offered an alternative to the successful
VA and FHA mortgage insurance programs for which many consumers and
2. Explain the recent growth and fall of PMI compared to government–
sponsored programs?
ANSWER: Since 1997 PMI companies have insured more than twice the
dollar amount of mortgage debt in the United States than these federal
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3. What is “pool” insurance and how is it used?
ANSWER: A recent trend for MI companies has been to insure pools of
mortgages. These mortgages are not necessarily over 80 percent LTV, but
4. How have PMI companies performed in 1980’s and 1990’s? Why the
difference?
ANSWER: In the 1980s the economic situation changed and the MI
industry suffered spectacular losses with $5 billion paid out in claims to
In the 1990s the PMI companies benefited tremendously as a result of the
economic expansion throughout the decade, a welcome period after the
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5. Discuss how PMI impacted the housing market and the secondary mortgage
market.
ANSWER: In a nutshell, PMI allowed more people to qualify for a
mortgage loan with a low down payment thus stimulating the housing
6. What different methods of PMI payment exist and how do you calculate
them?
ANSWER: There are zero premium and zero monthly premium policies.
First, the amount of coverage must be established. The amount of coverage
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7. What are the benefits and drawbacks of PMI vs. government insurance vs.
self-insurance programs?
ANSWER: PMI has many benefits as compared to MIP and self-insured
mortgage programs. The borrower will be able to obtain the lowest interest