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Perhaps leverage limits on home mortgages are in order? It would cause prices to fall, but the coming inflation could balance things out. There used to be a bi

Perhaps leverage limits on home mortgages are in order? It would cause prices to fall, but the coming inflation could balance things out. There used to be a bit of a leverage limit as anyone paying less than 20% was required to buy PMI. Somehow taking out a 80% loan and a second loan allowed people to work around this, or in some cases the lender was paying the PMI. In any case, one would have thought that the negative effects to the lenders would have been mitigated by PMI, but it seems to not be playing a role in the unraveling...

Retric 17y ago
PMI only works when a small number of people default at any one time. I would even suggest that PMI makes the system less stable when markets collapse. I suspect that people tend to push the edges of any stable system so structures like PMI don't really help things all that much. PMI is just a method of moving risk around the system, it's still there, but it does not look like the bank is taking the risk. However people selling PMI know that they will be bankrupted if X percent of mortgages fail at the same time. (AIG) At which point the person / group holding the mortgage get's the rest of the risk. PS: PMI is part of the derivative market and a large part of why all those bad loans where written.
- mattmcknight 17y ago
  I don't think you are right to connect AIG financial derivatives trades with this, buyer purchased PMI is very different from CDS. Most of the major providers don't seem to be bankrupt (MGIC, Genworth, RMIC, etc.). It would seem that this should have protected the banks, unless they were buying coverage for less than the loan amount. http://www.nytimes.com/2009/03/01/realestate/01Mort.html http://www.nytimes.com/2009/03/01/realestate/01Mort.html I think a key problem is that people were avoiding paying the PMI by getting piggyback loans, since the interest was deductible. However, the piggyback loans had greatly increased risk, particularly as they were subordinated to the 80% loans.

Retric 17y ago

PMI only works when a small number of people default at any one time. I would even suggest that PMI makes the system less stable when markets collapse. I suspect that people tend to push the edges of any stable system so structures like PMI don't really help things all that much. PMI is just a method of moving risk around the system, it's still there, but it does not look like the bank is taking the risk. However people selling PMI know that they will be bankrupted if X percent of mortgages fail at the same time. (AIG) At which point the person / group holding the mortgage get's the rest of the risk. PS: PMI is part of the derivative market and a large part of why all those bad loans where written.

mattmcknight 17y ago
I don't think you are right to connect AIG financial derivatives trades with this, buyer purchased PMI is very different from CDS. Most of the major providers don't seem to be bankrupt (MGIC, Genworth, RMIC, etc.). It would seem that this should have protected the banks, unless they were buying coverage for less than the loan amount. http://www.nytimes.com/2009/03/01/realestate/01Mort.html http://www.nytimes.com/2009/03/01/realestate/01Mort.html I think a key problem is that people were avoiding paying the PMI by getting piggyback loans, since the interest was deductible. However, the piggyback loans had greatly increased risk, particularly as they were subordinated to the 80% loans.