insurance is an insurance policy designed to protect the mortgagee (lender)
from any default by the mortgagor (borrower). It is used commonly in loans
with a loan-to-value ratio over 80%, and employed in the event of
foreclosure and repossession.
This policy is typically paid
for by the borrower as a component to final nominal rate, or in one lump sum
up front, or as a separate and itemized component of monthly mortgage
payment. In the last case, mortgage insurance can be dropped when the lender
informs the borrower, or its subsequent assigns, that the property has
appreciated, the loan has been paid down, or any combination of both to
relegate the loan-to-value under 80%.
In the event of repossession, banks, investors, etc. must resort to selling
the property to recoup their original investment (the money lent), and are
able to dispose of hard assets (such as real estate) more quickly by
reductions in price. Therefore, the mortgage insurance acts as a hedge
should the repossessing authority recover less than full and fair market
value for any hard asset.