Congress moves to halt insurance rip-off Homeowners with enough equity wouldn't be forced to insure their mortgages

Nation's Housing

February 23, 1997|By Kenneth R. Harney

IF YOU HAVE private mortgage insurance, you could be on the verge of getting important new federal consumer protections designed to prevent you from being hit with abusive overcharges on premiums.

In rapid succession last week, legislators in both the Senate and House introduced bills that would force all lenders for the first time to disclose to borrowers how and when they can cancel their mortgage insurance coverage. One bill, the Homeowners Protection Act of 1997, would go even further: It would require that private mortgage insurance be terminated automatically whenever the borrower's loan balance is equal to or less than 80 percent of the value of the home at the time the loan was closed.

Sponsored by Alfonse M. D'Amato, the New York Republican who chairs the Senate banking committee, the bill would outlaw a widespread industry practice: collection of mortgage insurance premiums long beyond the point necessary to protect the lender or owner of the mortgage from the possibility of financial loss due to default or foreclosure.

"This is a practice of fleecing homeowners which must be stopped," D'Amato said in introducing his bill. "Consumers are unknowingly paying anywhere from $240 to $1,200 a year for absolutely no reason."

D'Amato's bill, scheduled for banking committee hearings later this month, is the Senate companion to a House bill sponsored by Rep. James V. Hansen. Hansen, a Utah Republican, pushed his bill during the last Congress, but never attracted much support. This year, with increased media attention to overcharges in private mortgage insurance, he's attracted bipartisan backing.

Private mortgage insurance -- also known as PMI -- is required by most lenders whenever a borrower obtains a loan with less than a 20 percent down payment. The insurance protects the lender -- or the ultimate purchaser of the loan, such as giant investors Fannie Mae and Freddie Mac -- from loss in the event of a borrower's nonpayment of principal and interest. Homebuyers pay all the premiums for the coverage; lenders are the sole beneficiaries of the policies.

However, once a homeowner's equity stake in the property exceeds 20 percent -- either through amortization of the loan principal or through an increase in the resale value of the property -- the lender is relatively safe from loss.

Yet, according to congressional estimates, thousands of homeowners nationwide continue to be charged for insurance coverage long beyond the point when their equity exceeds 20 percent. Hansen cites the case of one unsuspecting homeowner who was still being charged for PMI premiums when her equity was 90 percent of her home value.

An eye-opening new estimate of the extent of the problem came last week when a Dallas-based loan portfolio analyst said he believes that as many as one-fifth of some lenders' mortgage portfolios consist of PMI-insured loans with equities over 20 percent of current market resale value. Lewis Hill, president of First American Tax Valuation Co., said in an interview that in one recent analysis of a 20,000-loan portfolio, PMI was still being collected on approximately 4,000 loans where the assessed valuation of the home put the borrowers' equity at or above the 20 percent mark.

While not all those borrowers may be eligible for insurance cancellation -- some loan documents prohibit insurance termination during the life of the mortgage -- Lewis believes that many should be eligible.

The problem: Very few borrowers understand their rights to cancel their insurance, in part because their lenders or loan servicers have never explained it to them. Both the Hansen and D'Amato bills would require periodic disclosure of those rights, as well as the conditions of eligibility for cancellation that may apply.

Some industry analysts say the keys to reform in the PMI arena rest not with lenders or insurers, but with the two largest beneficiaries of PMI coverage -- Fannie Mae and Freddie Mac. For several years, both have provided guidance on PMI cancellation to their loan servicers -- the mortgage companies who collect the monthly payments and administer the millions of home loans owned by the congressionally chartered giant investors. Both companies generally allow borrowers who can demonstrate equity levels of 20 percent or more to apply for premium cancellations.

Pub Date: 2/23/97

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