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Originally Posted by ROBERTENEAL
How did the "mess" get here in the first place?
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In the old days, you either put 20% down on a house, or if you didn't have 20% to put down on a house you bought PMI.
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Lenders Mortgage Insurance (LMI), also known as Private mortgage insurance (PMI) in the US, is insurance payable to a lender or trustee for a pool of securities that may be required when taking out a mortgage loan. It is insurance to offset losses in the case where a mortgagor is not able to repay the loan and the lender is not able to recover its costs after foreclosure and sale of the mortgaged property.[1] Typical rates are $55/mo. per $100,000 financed[2], or as high as $1,500/yr. for a typical $200,000 loan[3].
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During the real estate runup of the past 10 years the market was flooded with buyers who had nowhere near 20% to put down. In most cases they put 0%. Yet they bought not a penny of PMI. Why? The banks did this...
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If a borrower has less than the 20% downpayment needed to avoid a mortgage insurance requirement, they might be able to make use of a second mortgage (sometimes referred to as a "piggy-back loan") to make up the difference.[4] Two popular versions of this lending technique are the so-called 80/10/10 and 80/15/5 arrangements. Both involve obtaining a primary mortgage for 80% LTV. An 80/10/10 program uses a 10% LTV second mortgage with a 10% downpayment, and an 80/15/5 program uses a 15% LTV second mortgage with a 5% downpayment. Other combinations of second mortgage and downpayment amounts might also be available.
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In 2006, nationally 1 out of every 5 mortgage borrowers used an 80/20 product to skirt lending rules for PMI. In the two real estate markets which are in deep trouble - California and Nevada - the numbers were 1 out of every 3.
This was a bubble created by the so-called professionals in the real estate industry - banks, mortgage brokers, realtors, and appraisers.
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