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Sam bought a house that costs $500,000. Sam got a 95% LTV loan. The lender demanded...

Sam bought a house that costs $500,000. Sam got a 95% LTV loan. The lender demanded that Sam buy private mortgage insurance to insure the portion of the loan over 75% LTV. Suppose 5 years later, Sam’s mortgage balance is $400,000. However Sam defaults and his house sells for $220,000 in a foreclosure auction. How much will the mortgage insurance company pay Sam’s lender?

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Expert Solution

House cost = $500,000

Quantum of loan insured = (95% - 75%) * $500,000
= 20% * $500,000
= $100,000.

Mortgage balance = $ 400,000

Proceeds from sale of house = $ 220,000

Shortfall for bank = $400,000 - $220,000 = $180,000

Payment by the insurance company to the lender = $180,000 - $100,000
= $80,000.

Payment by the insurance company to the lender = $80,000.

jeff jeffy answered 2 years ago
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