When I wrote Let Your Mortgage Make You Rich!, a mortgage broker refuted my explanation if PITI–principal, interest, taxes and insurance–the four components of a monthly mortgage payment. The second "i" - insurance - stands for mortgage insurance, not homeowners insurance. It's what you used to have to pay if you put less than 20% down on a home. I say "used to," because some people think insurance is a waste. It does increase ones monthly payments.

So mortgage brokers started getting real creative with prospective homebuyers. Have you heard of 80/20? It's nothing the midnight real estate investing shows don't talk about all the time: buying with no money down. Eighty percent is for the mortgage, and 20% - also borrowed - is to pay the 20% down payment, thus avoiding mortgage insurance (PMI). The result is the home buyer gets 100% financing. And without private mortgage insurance, the lender is going to get screwed if the buyer defaults and the property goes into foreclosure.

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I hadn't thought about the insurer's consequences until I read Teresa Boardman's blog about it. The fact is some people still buy private mortgage insurance. It's just looked down upon by the smug, like listening to country music or something equally ordinary. Boardman, who is, by the way, one of the top real estate bloggers today, and was recently named in the top 12 women real estate bloggers, says the folks who do have PMI will be paying for a lot of the over-lending fallout. And then there are the carriers.

I have yet to find a good article on the total exposure of PMI and who has it. The mortgage underwriters have gotten all the headlines, but the big hit will be in the insurance industry….

…They are the ones who will take the big hit, not the mortgage companies. But in the end, they’re all bottom feeders, even if it seems like it’s all some kind of cartoon.

Excellent points, Teresa! And thanks for explaining Sponge Bob Square Pants. I never quite got that before.

Big insurance companies are going to start squirming. But not too much just yet, because surely mortgage brokers are going to revert to adding on private mortgage insurance, right?

At least a few people are discussing it:

Not one story I have read about the mortgage 'crisis' has mentioned the PMI That most of the loans required. How does the mortgage company lose money if the loan is insured?

I'm with Boardman, though. How many of these "crisis loans" were insured? And who's covering them? I've been researching it this morning and haven't found many facts. Half a year ago, Michael Cook cited  a $300,000,000 loss for the PMI Group. He predicted premiums would increase because perceived risk would increase. When we swing out of crisis mode, rates will not go down. More people will simply avoid PMI–which is part of what got us here in the first place!