Whatever happened to Mortgage Indemnity Bonds?

[Brendan Burgess]

In the good old days, people used to have pay Mortgage Indemnity Bonds if they borrowed over 80% of the value of the home.

One of the complaints was that the borrower paid, but got no benefit.

So are the banks now making claims on these bonds?

They probably only pay up if the home is repossessed. If that is so, then the insurance companies issuing the bonds must be delighted with the moratorium on legal action.

And what were the terms of these bonds? If the bank recovers the deficit from the insurance company, would the borrower be let off the hook?

 

[Square Mile]

Good question. I asked about this several years ago when I took out a mortgage in London. I beleive that it is exactly the same situation here in Ireland. It would have cost an additional £1,000, but in the end I did not need one because I had a favourable LTV.

According to my insurance broker, there was absolutely no benefit for the buyer of a property in having a mortgage indemnity bond. He explained that the house purchaser effectively pays for an insurance policy for the lender. If the purchaser defaults on the loan then the insurance company who sold the mortgage indemnity bond compensates the mortgage lender, the debt would transfer to the insurance company, who would then pursure the loan defaulter for the balance of the debt.

SM

 

[wbbs]

Dealt with these for years, I imagine they will come into play now if houses are repossesed and sold for less than owing. Normally covered balance of loan between 80% of value of house and whatever was being borrowed. Family member in UK in last property crash bought house for 50k, house was sold for 35k, indemnity bond paid bank the loss and then insurance company chased borrower for many years afterwards for the balance.

 

[Brendan Burgess]

OK

So they are of no benefit to the borrower. The insurance company will just pursue the balance anyway. In fact, they will probably be more aggressive than the bank in pursuing the deficit.

But it does mean that the problem for the banks is not as bad as feared if they have insured a certain portion of the loss.

Brendan