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June 5th, 2008

I don't recall if I posted about this, but apparently one of the reasons there are so few short sales (that is, the type of sale where the lender agrees to let a borrower sell a property for less than the loan outstanding, and possibly forgive the remaining, or maybe it's discharged in a bankruptcy or maybe the borrower has to pay it off eventually) is that lenders are refusing to sign off on them, knowing they can collect 20% of the value (of the outstanding loan, presumably, but possibly the value of the house -- but in a lot of these cases, the value of the house is less than the outstanding loan; this wouldn't make sense at all otherwise) from the mortgage insurer (think: PMI).

As soon as I heard that, I immediately thought, aha! This is going to change when the mortgage insurance companies start going belly up, which is pretty much inevitable given the sheer volume they're dealing with, and we know no one anticipated that.

Here it is:

http://www.marketwatch.com/news/story/fitch-downgrades-mgic-investment-pmi/story.aspx?guid=%7B1B7BC7EE%2D5199%2D48F7%2DB878%2D670D3EB36546%7D

A few mortgage insurers have been downgraded and are on negative ratings watch.
I didn't have a mortgage long enough to make a refi compelling, but I always found them pretty mystifying anyway. Having seen the Boston Herald (yeah, sorry -- linked to it from elsewhere) reporting on the how-many-refis for properties in foreclosure vs. those not, I've got a couple of rough metrics for anyone contemplating a refi:

(1) People started in prime and wound up in subprime. Don't do that.
(2) The principal owing increased across the refis. So if you refi, make sure the total owing has not increased unless you've got a damn good reason for it (e.g. R. took $15K out to build a garage, which increased the value of the hom e by more than that -- this is plausible, but still not without risk).
(3) The term of the loan should stay the same or go down.

Arguments based on payment are what got people into a mess in the first place; don't let someone play three card monte with the most debt you'll probably ever have.

Term should shorten.
Debt should shrink.
You shouldn't allow yourself to slide down the tiers of debt.