Bank of America denial due to PMI

[RubyLou]

A friend requested a loan mod as their mortgage is 51% and was denied because the loan is protected by PMI. Has anyone heard of this reason for denial?

[SillyWorld]

Did they call the Litigation department of the Mortgage Company..?? Did they check other routes like NACA.com, or who ever there bank is there may be a numberr from this board you can call or they can.. But many ion here would need further information on your issue's as each person has a different lifestyle, like depends on savings trusts funds etc/////

[RubyLou]

She called the number on the B of A website "If eligible, please call 1.866.977.2941 and speak with a member of our home loans team that is dedicated to this program." This person told her that her loan is covered by PMI which the bank purchased - not the borrower" and because of this, her loan is not eligible for modication. In November 2007, they financed a $290,000 purchase in Riverside County, CA with 5% down at 6.5% interest fixed for 30 years and were not required to purchase PMI perhaps because their FICO was over 800. They documented their almost $50,000 annual income and BofA approved them for a loan payment at 51%. They have 3 children (14, 6, 3) and so with childcare expenses it wouldn't pay for her to work. They struggle to make the payments and have never been late, but go without many basics to do it. No there are no trusts, but somehow they do manage to save a bit each month. There has been no job loss, but it just seems to me that they should never have been approved for that kind of percentage of gross and that in a way it was predatory. I hadn't heard anything about being disqualified for a modification because a loan is covered by PMI and was just wondering if anyone else had.

[LHarveyMadman]

Originally Posted by RubyLou

She called the number on the B of A website "If eligible, please call 1.866.977.2941 and speak with a member of our home loans team that is dedicated to this program." This person told her that her loan is covered by PMI which the bank purchased - not the borrower" and because of this, her loan is not eligible for modication. In November 2007, they financed a $290,000 purchase in Riverside County, CA with 5% down at 6.5% interest fixed for 30 years and were not required to purchase PMI perhaps because their FICO was over 800. They documented their almost $50,000 annual income and BofA approved them for a loan payment at 51%. They have 3 children (14, 6, 3) and so with childcare expenses it wouldn't pay for her to work. They struggle to make the payments and have never been late, but go without many basics to do it. No there are no trusts, but somehow they do manage to save a bit each month. There has been no job loss, but it just seems to me that they should never have been approved for that kind of percentage of gross and that in a way it was predatory. I hadn't heard anything about being disqualified for a modification because a loan is covered by PMI and was just wondering if anyone else had.

I read recently of borrowers with Wells Fargo having the same issue - if they had lender-purchased PMI, they're getting denied modification.

Here's the reference from the Home Affordable Modification Program Guidelines:

"For loans that have mortgage insurance (MI) coverage, the NPV Test will incorporate the value of the contingent claim payment in the event of default when evaluating projected foreclosure or modification scenarios. If the modification does not pass the NPV Test, then it will be referred to the appropriate MI company. The major MI companies have agreed to develop a mechanism by which they will pay partial claims where they deem appropriate to avoid foreclosure."

The NPV test basically compares (1) how much the bank would get if a borrower goes into foreclosure with (2) how much the bank would get if they modify a loan. If the NPV test reveals that the bank would make more money by modifying the loan, then the bank has to modify.

To illustrate a scenario in which the NPV test would be "positive", think of a borrower who owes $500,000 on a home that is now worth $300,000. If the bank lets the house go into foreclosure, it would only get $300,000, but if the bank modifies the loan, it would be able to keep collecting payments, and would not lose $200,000 in a foreclosure sale. So, it makes sense for the bank to modify.

This NPV test doesn't apply when there in PMI in place, because even if the borrower goes into default, the mortgage insurer would step in and compensate the bank for some or all of its losses. So, using the same scenario above, if the borrower has PMI, the bank will compare the cash flow from (1) default with partial offset of losses from mortgage insurance and (2) modification. If (1) is greater than (2), then it would be in the bank's financial interest to leave the loan unmodified and collect insurance payments. However, instead of letting this happen automatically, the case will instead be referred on to the mortgage insurer, to see if they will be willing to pay a partial claim on the loan to offset any loss the bank would incur in a modification. Based on these current guidelines, the mortgage insurers are not under any specific obligation to do so.

[RubyLou]

Thanks LHarvey for your response. She called again and this time was told first person was incorrect - there is no PMI and YES they qualify and a pkg will be mailed. You gave good information for her to use in case the first person was right after all.

[LHarveyMadman]

Glad to hear that things will work out.