How does PMI get a judgement against a defaulted home loan b

Posted: Thu Jul 15, 2010 05:43 am Post Subject:

PMI is protection for the LENDER in the event the mortgagee defaults on the loan and the lender loses money in the disposition of the property after foreclosure.

Let's say a person owes $250,000 on a first mortgage, and defaults on the loan. After several months of no payments, the lender forecloses, and the trustee holds a property sale on the courthouse steps. By the time all this happens, legal notices have been filed, legal fees have been paid, unpaid interest has accrued. To completely clear the loan, the mortgagee might now have to come up with $275,000 to stop the foreclosure proceedings and pay off the debt (or at least the $25,000 to get back on track).

Assuming that doesn't happen, and the property is auctioned off, whatever the lender nets from the trustee sale is applied to the outstanding debt. So let's say the property sells at the auction for $150,000. The lender has lost $100,000 + expenses, and the PMI policy pays that difference to the lender for its loss.

There is no recourse to the former mortgagee, because it was the mortgagee who paid the PMI premiums. Insurance is what it is: you pay, you [die/default/become disabled/etc], we pay. But you'll get a "Form 1099" for the "forgiven" amount of the debt and will have to pay income tax on that amount.