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By Erik Hare

Whenever he finds himself in a crowd, Spongebob goes into comedian mode. In his desperation to entertain, he usually starts out with his standard, “What’s the deal with airline food?” It’s supposed to be funny.

I get the feeling that if you find yourself in a crowd of REALTORS, it might be fun to go into the same mode and ask, “What’s the deal with PMI?” Only it’s not a comedy routine. Sure, you’d get the same groan that Spongebob does, but if you have more brains than a sponge you would probably expect it. PMI isn’t all that funny.

This is the insurance that you are required to take out when you buy a home with a “high loan to value ratio,” which is the fancy way of saying you didn’t have to put a lot down. A down payment of up to 20% or more is considered a good way to make sure that you’re not going to walk away from a property no matter how bad things get. If you can’t afford that much down, you can buy Private Mortgage Insurance (PMI) instead.

The idea is that the risk of lower home prices, job loss, and so on is shared in a pool through companies that sell PMI. You pay a few hundred bucks, and you can get a house with no money down (or very little). There’s only one problem with it, though – it’s a few hundred bucks a month. You have to pay this to insure your mortgage holder against loss, not for anything you get as a homeowner. In order to get out of this, all kinds of new products have been created like piggy-back loans, to more or less fake the amount being put down. PMI really is as popular as Spongebob, yet like the real one people will do nearly anything to avoid it.

Alas, PMI is useful. Just ask Mr Crabs – er, the insurers that sell it. PMI has provided a steady stream of income for the typically small companies that sell it and then sell of the policies to re-insurers so that they eventually make their way into the larger market. These things have made mon-ay. Lots of the green stuff. In a booming market, what’s the risk? It’s just … a few hundred a month in free money.

That’s not the situation we have today, of course. Something bad has happened in the real estate market and we get the feeling that Patrick Star the mortgage broker has been making a lot of loans that anyone with a neural cortex probably wouldn’t. Many of those loans are failing at the same time, and it’s the people with the PMI contracts that are going to pay for a lot of it. Every short sale, every foreclosure hits them. They can’t hide under a rock to avoid it, either.

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. It’s only a matter of time. Who will get it? How big will it be?

PMI might never have been all that popular. Heck, it was so annoying that people would do anything to avoid it. But it served a useful purpose all these years, like a mystical fry cook that will work for almost no money. 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.