Who Pays for Poorly Underwritten Loans?
Bank of America has filed suit against MGIC, one of the nations largest mortgage insurance companies. MGIC has rescinded many of its obligations to pay saying that they aren't contractually obligated to pay for loans that weren't properly underwritten. According to a Bizjournal story, MGIC cut 1.2 billion dollars in payments and Bank of America has filed a lawsuit as well as discontinued using MGIC for its mortgage insurance. Bank of America has also discontinued using MGIC to insure loans.
If you have a loan with less than 20% down, you or your lender has paid for mortgage insurance on your loan. If the loan goes bad, the mortgage insurance company is supposed to pay up. However, with so many bad loans, mortgage insurers are pointing the finger back at the bank in many cases saying that the loans were not underwritten properly. In these cases, the insurance companies won't pay out and in my opinion, shouldn't.
What was missing during the housing boom was accountability. I don't see a problem making sure that the right entity pays for loans going bad unless its another taxpayer bailout....