The bank makes a knowingly risky loan for 300K in an inflated market. The home owner ends up losing the home two years later and the home is not valued at 200K. The bank liquidates it for 80% FMV = 160K
They are out 140K. They file a claim on the PMI insurance that went with the loan and recoupe the loss. This is what is happening frequently now and threatening to collapse the economy further. It is also part of the reason it is now so difficult to get a home loan. PMI companies are taking this catastrophe on the chin. It is why the fed is talking about more QE
to prop up the housing market. Most of the QE won't go to banks. It will go to PMI companies. This is strictly my opinion based on the high numbers of investigations going on now. Investigators are going through original loan applications in an attempt to find nefarious activity, or numbers which should have raised a red flag, yet did not. Other offenders in the quagmire are loan modification scams which did indeed trigger a high percentage of foreclosures. In some cases, even the big banks themselves had a hand in the outcome of foreclosure by telling home owners to pay a lesser amount monthly while the
modification process was being done. Eventually, telling the home owners they failed to modify the loan, and informing the home owners they now owed all the back short payments & penalties.
Banks, concerned greatly on the stability of PMI companies future, had motivation to help push home owners into foreclosure
sooner rather than later. The investigations in progress now are intended to find what should have been cause for concern on the original loan, the intent being that the PMI company can deny the claim, and or negotiate a lower settlement on the claim. The entire situation, all of it, goes back to greed on behalf of the banks, brokers, and people who knowingly took out loans they probably could not afford long term, naively believing home prices would continue rising rapidly indefinately.
I'm not an expert on this. And maybe I am off base here. But much of the above is fact in regard to the PMI claims and current investigations underway.