Private mortgage insurance relief finally seems near D'Amato and Faircloth predict quick passage by the Senate

Nation's Housing

October 12, 1997|By Kenneth R. Harney

A FINAL resolution to the long-running Capitol Hill controversy about homeowner overpayments of private mortgage insurance premiums appears to be in sight.

Republicans on the Senate Banking Committee have reached a consensus on a reform bill that would offer significant new consumer protections to all homeowners paying for private mortgage insurance (PMI).

Besides benefiting from mandatory disclosures about premium costs and the rights of cancellation of insurance, new borrowers nationwide would be guaranteed automatic cancellation of premium payments whenever their equity in their home reached 22 percent.

The automatic cutoff -- and other provisions of the bill -- would pre-empt state laws on mortgage insurance. States such as California and New York no longer would be able to enforce their own consumer protection rules on PMI once the federal law went into effect.

On Oct. 3, negotiators for Senate Banking Committee Chairman Alfonse M. D'Amato of New York and Sen. Lauch Faircloth, a North Carolina Republican, outlined the new reform bill, and predicted quick passage by the committee and the Senate.

The bill then would have to go to conference committee with the House, where a bill with a less generous automatic-cancellation trigger at 25 percent equity passed in the spring.

Private mortgage insurance has been a hot consumer issue in Congress for the past two years, following revelations that many homeowners needlessly are paying $500 to $1,000 or more a year in premiums.

Mortgage insurance is required on low-down payment, conventional (nongovernment) home mortgages whenever the down payment by the borrower is below 20 percent of the purchase price of the house. Premiums are paid by the borrower, but solely protect the lender against financial loss in the event of default or foreclosure.

Though practices vary widely, some lenders -- along with Fannie Mae and Freddie Mac -- permit consumers to request termination of PMI payments when their equity stakes exceed 20 percent. But lenders and investors rarely explain mortgage insurance to borrowers, or spell out the right to cancel coverage.

This leaves thousands of homeowners paying monthly insurance premiums long beyond economic necessity. Even the mortgage insurance industry estimates that 250,000 or more premium-paying borrowers could qualify for cancellation, if they knew it were possible and understood how to request it.

The Senate bill, if enacted, would go a long way toward correcting the PMI problem. Here's a brief overview of what it would do, according to banking committee negotiators:

All current homeowners paying PMI would receive an annual disclosure notice informing them that they "may" have the right to request cancellation of their coverage.

The disclosure would provide a contact person or phone number for borrowers to learn whether -- and under what conditions -- they could qualify.

New borrowers who close loans after the effective date of the bill would receive detailed PMI coverage disclosures, plus a loan amortization schedule projecting the year in which their equity stake will exceed 20 percent.

The disclosure would also explain that the mortgage servicing company administering the loan will, in any event, cancel coverage automatically when the homeowner's equity hits 22 percent, based on principal pay-down.

Certain conditions will apply, however. First, to qualify for premium cancellation at 20 percent equity, borrowers must have a good payment history over the prior two years, and must be able to demonstrate that the house's resale value has not dropped below the original sale price or appraised value, whichever was lower.

A full-blown appraisal won't be necessary. Loan servicers can accept a low-cost ($15-$25) "certification of value" from a realty agent or other contractor, and can consult electronic property valuation databases.

To qualify for automatic cancellation at 22 percent equity, borrowers would simply have to be current on their mortgage payments. Even if you were late once or twice in the past year -- but got back on time -- you'd qualify for the automatic cutoff. No property valuation documentation would be required.

A key exception to the automatic cancellation requirement: Borrowers using certain low-down payment "affordable housing" loan programs offered by Fannie Mae and Freddie Mac would not be guaranteed an automatic end to premium payments until they reach their "half-life" point -- that is, 15 years on a 30-year mortgage, 7 1/2 years on a 15-year loan.

A Senate aide said that "affordable" mortgages directed at modest-income first-time buyers typically entail a significantly higher risk of loss to the lender -- even when the borrower's equity exceeds 20 percent.

What's the outlook and timetable for PMI reform? Capitol Hill sources say a final, compromise bill -- probably using the Senate's 20 percent and 22 percent thresholds -- should be completed before the end of the year.

Pub Date: 10/12/97

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