Property Insurance. Mortgage Insurance [DOT 10] 8/29/2017

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1 Mortgage Insurance [DOT 10] Lender typically requires private mortgage insurance (or PMI ) for any mortgage loan where the original loan amount >> 80% of fair market value of mortgaged land PMI allows someone to buy a home with a smaller downpayment (rather than having to wait to accrue 20% for a downpayment ) The less the borrower puts down, the greater the risk that foreclosure will produce deficiency (i.e., sale proceeds won t pay off the full debt) Low down payment borrower must pay for PMI to insure lender against this risk (Fannie won t buy loans with LTV > 80% w/out PMI coverage) If borrower carrying PMI defaults, and foreclosure sale results in a deficiency, lender/assignee can recover this loss from the PMI insurer Once borrower builds up enough equity (20 23%, depending on loan type), borrower has right to cancel PMI coverage [Homeowner s Protection Act of 1998] Premiums range from 0.3% to 1% of loan amount per year, paid monthly (sliding scale based on downpayment amount, loan term) E.g., premium amounts charged by one PMI insurer, assuming home price = $200,000, 4% interest rate, 30 yr note If mortgagor borrows $190,000 (95% LTV), PMI payment = $114/mo. ($1,368/year, or.7%) If mortgagor borrows $180,000 (90% LTV), PMI payment = $81/mo. ($972/year, or.54%) Property Insurance 5: At Borrower s expense, Borrower must insure Lender s interest in the Property against casualty risks (e.g., fire) 3: Borrower must escrow 1/12 of annual cost of insurance with Lender each month Lender can thus use escrow funds to pay insurance premiums each year as they become due Borrower also pays into escrow for real estate taxes and private mortgage insurance (PMI) 1

2 If Borrower didn t pay these items, it would threaten lender s interest Nonpayment of real estate taxes = tax lien in favor of municipality (lien has priority over all other interests, incl. mortgages!) Nonpayment of insurance = cancellation of insurance = possible uninsured casualty loss Nonpayment of PMI = loss of recourse to insurance if borrower defaults and foreclosure results in deficiency Lender may waive Borrower s obligation to pay to Lender Funds for any or all Escrow items at any time. Why would Borrower want a waiver? Why would Lender agree to waive escrow? Escrow Why Is Mortgage Silent re: Title Insurance? If Borrower is sufficiently creditworthy (high enough income or other assets), mortgagee may agree to waive escrow requirement Fannie and Freddie seller guidelines allow waiver of escrow, subject to certain standards, but escrow authorization must remain in the loan documents (this way, they could be reinstated if Borrower defaults or Borrower s financial circumstances change) Title insurance is different Owner s policy (insures borrower s title) Loan policy (insures validity and expected priority of lender s mortgage lien) Lender DOES typically require borrower to pay for cost of loan policy of title insurance (for lender) [required by Fannie/Freddie] Title insurance involves a one time premium, however; there s no recurring premium cost requiring payment covenants in the mortgage 2

3 Exemptions: Missouri Debtor can keep certain property exempt from creditor claims (not a complete list): Up to $15,000 equity in home (homestead) Up to $3,000 equity in one car Up to $3,000 in household goods Up to $500 in jewelry ($1,500 for wedding rings) $3,000 in tools of the trade $600 wild card (any asset) An exemption allows a debtor to retain an exempt asset free of the claims of creditors generally E.g., Bailey gets judgment vs. Uphoff for $4,000 If Uphoff s house is worth <= $15,000, it is exempt from Bailey s claim (i.e., Bailey couldn t have the house sold at an execution sale) If house is worth > $15,000, Bailey can have it sold at execution sale; but, first $15,000 of sale proceeds would be paid to Uphoff (exemption), Bailey could only be paid from surplus proceeds over $15,000 Exemptions and Secured Creditors But, an exemption in an asset doesn t apply with respect to a secured creditor as to that asset E.g., Uphoff grants Bailey deed of trust on his house to secure debt; Bailey can foreclose if Uphoff defaults, w/out regard to Uphoff s exemption right Common law = granting security interest to a particular creditor in an asset = waiver of any exemption as to that asset (vs. that creditor) 26 of Missouri DOT incorporates this rule Title Theory vs. Lien Theory Title theory: mortgage is a conveyance of legal title, and thus by default mortgagee has the incidents of title (incl. right to possession and right to collect rents/profits) Lien theory (majority today): mortgage only grants a lien (security interest) Thus, mortgagor retains right of possession and right to rents prior to foreclosure 3

4 Freddie Missouri Deed of Trust Pg. 3: Borrower irrevocably grants, bargains, sells, conveys and confirms to Trustee, in trust, with power of sale, the following described property [property description]. 25: Trustee hereby leases the Property to Borrower until this Security Instrument is either satisfied or released or until there is a default. Does this mean Missouri follows the title theory or the lien theory? Missouri courts have consistently held that Missouri is a lien theory state [I]t is settled in Missouri that a grantor in a deed of trust does not convey the title to a trustee, but creates a lien on the land to secure the payment of debt, and that the grantor continues the owner of the land until entry for breach of the condition of the deed of trust. R. L. Sweet Lumber Co. v. E. L. Lane, Inc., 513 S.W.2d 365 (Mo. 1974). 25 confirms mortgagor s right to possession Formally, mortgagor is characterized as a tenant during the loan term But formal location of title is not controlling; mortgagor is not merely a tenant, but holds equitable title that can only be extinguished by foreclosure sale after default Originally, 25 also gave foreclosure sale buyer standing to use MO s unlawful detainer statute to recover possession from borrower (as if evicting a tenant ) (MO has since amended its statute to give explicit standing to foreclosure sale buyers) [RSMo ] Question 2 Does it really matter whether a state follows the lien theory or the title theory? Why or why not? 4

5 In most situations, a dispute over possession of the land or the right to rents will be resolved by the language of the mortgage The state s theory may thus become determinative only when the mortgage is silent Also, in many lien theory states, statutes invalidate language in the mortgage that purports to give the mortgagee the right to possession prior to foreclosure [p. 375] 5