(This is Part 3 of a five-part series. Read Part 1, "Lenders wise to beef up default-risk reserves"; Part 2, "Borrowers, insurers would save with new mortgage insurance"; and Part 4, "Help from feds not a bailout"; and Part 5, "Struggling borrowers get fresh start under new plan.") Last week, I described a new type of mortgage insurance called mortgage payment insurance, or MPI. MPI covers cash-flow risk as well as collateral risk, as opposed to traditional mortgage insurance (TMI), which covers only collateral risk. Cash-flow risk is the risk of an interruption in the scheduled payments from the borrower to the investor. Collateral risk is the risk that proceeds from foreclosure sale will not be sufficient to pay off the loan balance and rei...
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