Have you heard of Mortgage Payment Insurance (MPI)?

May 19, 2008

Have you heard of a new type of mortgage insurance called mortgage payment insurance, or MPI? MPI covers cash-flow risk as well as collateral risk, as opposed to traditional mortgage insurance (TMI), which covers only collateral risk.

Cash-flow risk is the risk of an interruption in the scheduled payments from the borrower to the investor or bank. Collateral risk is the risk that proceeds from foreclosure sale will not be sufficient to pay off the loan balance and reimburse the investor for foreclosure expenses.

Under MPI, the insurer would guarantee timely receipt of the payments, so that the investor continues to get the payments after the borrower defaults. If the default is not corrected, the payments continue until the foreclosure process is completed, at which point the investor is reimbursed under the collateral-risk insurance part of the policy.

The incredible thing about MPI is that it will cost the insurer little more than the cost of TMI, and in many cases it would cost less. The assumption is that the risky loan goes into default followed by foreclosure and calculated the loss to the insurer with a TMI policy. Then using the same default/foreclosure scenario to calculate the loss on an MPI policy with the interest rate reduced to 6 percent. Since the insurer assumes all the default risk with MPI, the rate-risk premium should disappear.

Insurance companies find that the insurer’s losses were actually lower with MPI than with TMI. While the insurer made payment advances, the advances simply prepaid the amount due at foreclosure dollar for dollar. And because of the lower interest rate with MPI, the loan balance and the unpaid interest due were lower, reducing the loss. The insurer did lose the interest it could have earned on the payment advances, but this was much smaller than the reduction in the amount due.

By keeping mortgages in good standing until they are paid off, MPI would help block the erosion of investor confidence that stems from increasing numbers of nonperforming loans. This has been a central feature of the current real estate crisis. If you have any questions please contact Jim Soda or any associate of the Jim Soda Group for further explanation.

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One Response to “Have you heard of Mortgage Payment Insurance (MPI)?”

  1. Foreclosure Says:

    Hey!

    Thanks for the informative post! I don’t even have an idea of Mortgage payment Insurance.


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