PMI reform unlikely very soon

Nation's Housing

November 23, 1997|By Kenneth R. Harney

The failure of Congress last week to pass reform legislation on one of the hottest consumer issues in real estate -- overpayment of private mortgage insurance (PMI) premiums by homeowners -- raises serious questions about whether legislative relief will be possible during 1998, a year in which the entire House is up for re-election.

It also raises practical questions for millions of homeowners who already are paying PMI premiums, but may be unclear about how and under what conditions they can terminate their mortgage insurance policies.

Here's a quick update on the issue as Congress left for recess: After nine months of work, why didn't Congress produce the reform package that leaders in both houses promised in 1997?

Ironically, both houses did pass far-reaching PMI reform bills. Each bill would have required lenders for the first time to cancel PMI coverage and payments once a homeowner's equity in the property reached a certain point -- 25 percent in the House version, 22 percent in the Senate's. In the closing hours before recess, however, House Democrats declined to accept the Senate's PMI bill, which had passed the Senate by a unanimous vote. Democrats on the House Banking Committee objected to several features of the Senate bill, particularly the pre-emption of virtually all state consumer-protection statutes on PMI.

What's the outlook for some sort of compromise in 1998?

Dubious. But the possibility exists that Republicans and Democrats will get together in conference and produce a compromise before mid-1998.

In the absence of federal reforms, what rights do homeowners have to eliminate PMI?

Consumers in New York, Minnesota and California have state legislative protections and should inquire about termination procedures with state banking or mortgage regulatory agencies. But the majority of Americans with PMI must look to the language of their own mortgage notes to determine whether they are permitted to request PMI cancellation at any point. Homeowners whose loans are owned by super-investors Fannie Mae or Freddie Mac, and who have good repayment histories, may be able to request cancellation when their equity in the property reaches 20 percent, either through loan amortization (pay down) or through appreciation in property values.

What about people with FHA (Federal Housing Administration) loans?

FHA-insured borrowers have to pay premiums for the duration of their loan. Neither bill would change that rule. It's one of the little-advertised disadvantages of FHA loans.

Would the pending federal bills allow all homeowners to request PMI cancellation due to appreciation in the market value of their homes?

This is a contentious point. The Senate bill would allow consumers to request cancellation of their PMI payments only when they have paid down 20 percent of the original value of the house. There is no provision for consumers to cite the increased market resale value of their property -- whether through inflation or through capital improvements -- as the basis for a cancellation request. The House bill, in contrast, specifically allows the use of appraisals when the owner of the mortgage -- say, Freddie Mac or Fannie Mae -- takes market value appreciation into account in granting PMI cancellations. But even the House bill creates no independent right for consumers to use market value data if the loan owner doesn't expressly permit it.

Pub Date: 11/23/97

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