Home > 2012 > Mortgages

Mortgage Insurance Shocker: Collections After Default

Advertiser Disclosure Comments 7 Comments

Homeowners who obtain low down payment mortgage loans are often required to pay monthly premiums for mortgage insurance (MI). Mortgage insurance helps protects lenders in case borrowers default by reimbursing some of the lender’s loss. But homeowners who purchase MI may not understand that if they lose their homes to foreclosure, the insurer may come looking to them to reimburse its losses.

“Basically, MI companies cover the lender’s loss during foreclosure.  Since they cover this loss, they later are trying to seek reimbursement from the homeowner.  The homeowner essentially owes the MI company money rather than the foreclosing lender,” explains Troy Doucet, an attorney with Doucet & Associates, LLC and author of 23 Legal Defenses to Foreclosure.

But Doucet isn’t convinced that this is clearly disclosed to homeowners when they obtain mortgages and agree to pay for MI, and he’s been representing clients challenging claims by mortgage insurance companies.  He says private mortgage insurance companies, Fannie Mae and Freddie Mac, and even the federal government (for FHA and VA loans) are going after homeowners for these losses.


Credit.com’s Credit Report Card
Check your credit bureau profile for free with this great tool. See your detailed credit evaluation, expert advice on managing your credit, and unlimited free updates every 30 days.
Get Started Here »

[Credit Calculator: Use Credit.com’s Free Credit Report Card]

“I’d frame it this way,” he says. ”A mortgage insurance company shouldn’t be able to collect against a borrower any more than her auto insurance company could collect against her after paying an auto claim on her behalf.”

“This is a poorly understood area,” agrees R. Wilson Freyermuth, a law professor with the University of Missouri. But he believes it’s “misunderstood by consumers.” They think, “I am paying this and I must be paying it for my own benefit. But private mortgage insurance is really insuring the lender and not the borrower. When the private insurer has to pay off the lender because it suffered a loss, that loss will typically be passed on to the borrower.”

Subrogation is the basic principal behind these transactions. Subrogation is defined as:

the act of subrogating; specifically : the assumption by a third party (as a second creditor or an insurance company) of another’s legal right to collect a debt or damages. (Mirriam Webster dictionary)

In other words, the right to collect is subrogated to, or assumed by, a third party, often an insurance company.

[Related Article: Underwater On Your Home? Your Six Options]

Using an auto insurance example, Freyermuth poses a hypothetical scenario:

“Suppose I have a policy with State Farm. You are driving drunk and run into me, and you are uninsured. State Farm pays me off. They become subrogated and can come after you to the same extent that I could have.”  Then why don’t auto insurance companies routinely go after their customers when they have to pay claims?  He explains: “My (own) insurance company can’t (generally) subrogate a claim back against me.”

In the case of mortgage insurance, the insurance is for the benefit of the mortgage company, not the borrower. That’s why a borrower who pays the mortgage insurance premium may be pursued for payment by the mortgage insurer after a claim is paid.

If It Happens To You

What happens if you’ve lost your home and are now being hounded by a mortgage insurer, Fannie or Freddie, or a governmental agency?

“Before taking any course of action, the best advice I can offer is to contact your lender and then consult a real estate attorney regarding your rights,” says Andrew Schrage, co-owner of Money Crashers Personal Finance. He adds, “If you end up owing money, just be sure that you aren’t paying twice. If your original lender received money by filing a PMI claim and later sells your mortgage, there are situations where you won’t have to pay this amount to the new lender.”

[Featured Products: Research and Compare Mortgage Rates at Credit.com]

Getting good legal advice is essential, agrees Doucet, who says, “People jump out of the frying pan and into the fire” when they walk away from or lose their homes. Whether or not the insurer or guarantor can pursue the borrower depends on a number of factors including whether the loan is a recourse or non-recourse loan, as well as whether the statute of limitations for collecting on deficiencies has already passed. If a mortgage insurer is threatening a lawsuit, or has already obtained a judgment against the borrower, it may make sense to talk with a bankruptcy attorney.

As the losses to lenders and insurers pile up, homeowners may find that those mortgage insurance premiums they’ve been paying will be used to collect from them.

Image: Krystian Olszanski, via Flickr.com

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

  • Glenn G. Millar

    Great article! Definitely something I didn’t know.

  • CLee

    My husband had a VA loan foreclosure in 1994. He was not contacted in any way about it (The VA said they had sent letters to the old address in another state) and now with interest owes over $30,000. The claim there is no statute of limitations for this. Now they want to take all of his disability payment toward the loan. We have sent the financial statement along with letters to ask for a waiver. Is there anything else we can do?

  • Maria

    Are insurance payouts on property damage (ie hail), and the repair work is completed, taxable income? Is there a circumstance where one would be taxed, maybe upon the sale of the property later.

    • Gerri Detweiler


      We are credit experts not tax experts. Unfortunately. we can’t help with this one. Perhaps one of our readers who is a tax expert can weigh in.

  • Pingback: Foreclosure Defense | Troy Doucet()

  • Pingback: Consumer Protection Cases | Troy Doucet()

  • Pingback: Loan Modification Abuse | Troy Doucet()

  • Pingback: Motrgage Service Fraud | Troy Doucet()

  • http://www.Credit.com/ Gerri Detweiler

    First of all, paying ahead usually doesn’t protect you from having to make payments until the loan is paid in full. Usually it just pays down the balance of the loan but you must continue making your scheduled payments if you run into trouble. Having said that, they must properly credit your payments.

    As for the mortgage insurer paying part of it, they typically do not fully insure the loan. They just pay off part of it. So there may be a balance with both at this point.

    Nevertheless, you are dealing with a very difficult situation and I would really encourage you to talk with a consumer law attorney who can help you understand your options here. Visit NACA.net for a referral. I hope they can give you some answers and help you get back on track.

    The other alternative would be to file a complaint with the Consumer Financial Protection Bureau, but given you are possibly facing the loss of your home, I’d go the attorney route if you can.

  • Tom D

    I have a situation to share but also looking for feed back. My mother in law passed away last year January 2015, her home ( a twin home connected to mine) was in the foreclosure process before she died. A year later her lender cancelled the foreclosure process 4 days before the court hearing. They sent a letter saying they have used the PMI insurance. We have a new collections company mailing request for payment to her estate weekly. My question is who owns the property? If the bank uses the insurance to satisfy the loan, does the property go back to the estate?

    • http://www.credit.com/ Credit.com Credit Experts

      For something this complex, you might want to consult an attorney who specializes in consumer law, real estate or foreclosure.

Certain credit cards and other financial products mentioned in this and other articles on Credit.com News & Advice may also be offered through Credit.com product pages, and Credit.com will be compensated if our users apply for and ultimately sign up for any of these cards or products. However, this relationship does not result in any preferential editorial treatment.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Our Owners

Credit.com is owned by Progrexion Holdings Inc. which is the owner and administrator of a number of business related to credit and credit repair, including CreditRepair.com, and eFolks. In addition, Progrexion also provides services to Lexington Law Firm as a third party provider. Despite being owned by Progrexion, it is not the role of the Credit.com editorial team to advocate the use of the company’s other services. In articles, reporters may mention credit repair as an option, for example, but we’ll also be sure to note the various alternatives to that service. Furthermore, you may see ads for credit repair services on Credit.com, but the editorial team isn’t responsible for the creation or implementation of those ads, anymore than reporters for the New York Times or Washington Post are responsible for the ads on their sites.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team