Private mortgage insurance (PMI) companies become involved when a borrower needs a loan larger than 80% of the value of his or her real estate.
If neither FHA insurance nor VA guarantees are available, PMI comes into play. The PMI companies write policies that protect lenders from the consequences of loaning more than 80% of the value of a home by insuring a portion of the loan. They must pay off the lender if the loan goes to foreclosure and brings an insufficient amount of money to pay off the loan.
If the lender bids on the property, the PMI company reduces the lender’s claim by the amount of the bid, plus any profit made when the lender sells the foreclosed real estate.
Usually, the lender must notify the PMI company when a loan is between 60 and 120 days past due. At that time, the PMI company will ask if the lender has procedures in place to counsel the borrower and attempt to preserve the loan. If not, or if the lender contacts have been ignored by the borrower, then the PMI company will request permission to contact the borrower directly.
Because the insurance company will probably have to pay a claim if there is a foreclosure, it is very motivated to avoid that outcome. If foreclosure cannot be prevented, then the PMI company wants to maximize the sales price of the real estate and, as a result, reduce the amount of its insurance payout.