Best Answer: PMI protects up to 90% of the loan amount with proceeds payable to the lender. PMI does nothing for the homeowner, except afford the lender additional security for their risk in lending to you. Indirectly, it allows banks to loan money when prudence might dictate otherwise.
PMI companies ARE paying out billions of dollars to lenders, but again, the lenders must foreclose first, and then file a claim to collect 90% of their losses. This is still not enough to stem the tide.
Keep in mind that a lender might only make 2-4% of the loan amount as profit, after selling the loan. If the loan goes bad, the lender has to buy it back, while making your missed payments. Then, the lender has to go through all of the expense of foreclosing or otherwise settling your case before trying to collect from the PMI firm.
If this was on a loan-by-loan basis, it might not be so bad, but that is not how it works. A
lender will package $100 million worth of loans in a single offering. They might sell that bundle for $103-104 million. If the default rate goes over a certain amount, say 3-5%, then the lender has to give back the $103-$104 million all at once.
As you can imagine, it only takes a couple of bad bundles to break a lender. If a lender has a 5% default rate, they are out of business, because they had to pay all of their profits out to buy back those bundles. That's without even taking into account any of the lender's expenses of marketing, salaries, and operations.
Defaults are quite high right now, so that is the reason for the collapse.
You are paying it, because you didn't have 20% to put down on your home. If you did, you would not be walking away, unless your house dropped in value by that much with no chance of recovery.
Source(s): Financial Planner, Realtor, Mortgage Originator, and more. See profile.