I’d blogged quite some time ago about the unwillingness of my brother’s mortgage lender to work with him so that he’d be able to make some kind of payments and stay in his home. I’d been amazed to hear about that unwillingness, because it’s obviously in the bank’s best interest to keep a mortgage-paying homeowner living there, even if it means the payments are lower for a while. The alternative is to lose those payments altogether and have to deal with what’s left of the property after the homeowner defaults and moves away to parts unknown. I would even venture that when the homeowner lives in an area or works in a field hit hard by a tough economy, the mortgage lender should be even more apt to work with the borrower, especially when the borrower contacts the lender in good faith to explain the situation and make some serious compromises.
Unfortunately, that theory was completely shot to pieces by the experience of my brother and his family. Why, why why?
The answer is now oh, so obvious and simple. Private Mortgage Insurance. Mortgage Insurance can also be public, that is, provided by the government. My brother’s was the private kind, in which the lending institution requires the borrower to pay a monthly premium (say $120 or so) to a third party, an insurance provider. In exchange for this service (provided by the borrower’s extra payments), the mortgage provider enjoys reduced or eliminated risk. With mortgage insurance, a defaulted loan is no longer such a problem for the lending institution. Voila! There is now little to no incentive for the lending institution to help its customers. That’s evil. Customers become, well, what would you call them? Targets? Victims? Suckers? Of course, this is just another facet of the evil already known: that too many publicly-insured mortgages have been provided to people who really had no ability to pay for them. But see? Private mortgage insurance is just as bad.
All of this leads me to conclude that mortgage insurance is intrinsically evil. Well, OK. It’s not evil like sin, but it is evil like temptation. It leaves its targets/victims/suckers with no recourse but to default. This is what happens when people and governments artificially change the natural forces of the economy. Look for more examples coming to a world superpower near you, only now with lots of hope and change.
Insurance certainly encourages mortgage lending. It has become so widespread because it relieves lenders of risk. Those borrowers the insurance companies refuse to insure are covered by the Federal government housing entities,which ended up requiring the bailout we see Congress giving to us – good and hard (as Will Rodgers said).