Homeowners can halt loan insurance sooner

Nation's Housing

New limits are placed on FHA, Fannie Mae mortgage insurance

April 25, 1999|By Kenneth R. Harney

THOUSANDS OF homeowners who now pay for monthly private mortgage insurance should be beneficiaries of sweeping new insurance-cancellation guidelines nearing completion at the country's two biggest sources of mortgage money -- Freddie Mac and Fannie Mae.

Neither company has announced its planned reforms. But the upshot of the changes will be to enable more homeowners to stop paying costly loan insurance premiums sooner than they can now. For some borrowers, the savings could exceed $1,000 to $1,200 a year. Here's what's about to happen, with formal announcements expected by early next month:

Freddie Mac plans to unilaterally extend consumer protections on private mortgage insurance (PMI) enacted by Congress last year to all insured loans in its multibillion-dollar portfolio.

Under the law, only new mortgages closed on or after July 29, 1999, have to be covered by Congress' automatic termination reforms.

Fannie Mae, for its part, plans to extend automatic termination rights to insured loans in its portfolio at the midpoint of the mortgage term (example: year 15 for a 30-year mortgage).

The Freddie Mac-Fannie Mae initiatives, outlined last week by officials at both firms, should be welcome news to PMI-paying borrowers who felt they were cut out of the Homeowners Protection Act o f 1998, the national PMI reform law. That statute was enacted after years of consumer complaints about routine overpayment of PMI premiums.

Private mortgage insurance -- currently paid by more than 5 million American homeowners -- is required by most lenders whenever a borrower's down payment is less than 20 percent. Premiums are paid by the homeowner, but the insurance coverage solely protects the lender against financial loss in the event of default or foreclosure. Premiums vary according to the size, type and perceived risk of each loan, but generally run from $500 a year to more than $1,200.

Lenders face only small risk of loss when a homeowner has a 20 percent or greater equity stake in a property. Yet for years, thousands of borrowers have been allowed to continue to pay PMI premiums indefinitely -- even when their equity exceeded 30 percent or more. They continued to pay because no one told them that the lender's economic risk was nil, and that they could ask the lender to terminate the insurance policy.

The Homeowners Protection Act sought to put an end to that.

Under the law, beginning July 29, all PMI-insured borrowers have to receive detailed disclosures and cancellation instructions from their lenders or mortgage servicers.

All new home loans closed on or after July 29 will also be eligible for automatic cancellation by the lender -- no request from the consumer will be necessary -- when the loan balance has been amortized down to 78 percent of the original property value. Lenders will also be required to refund all "unearned" PMI premiums. They will have 45 days after insurance terminates to repay any premiums they collected from borrowers for coverage beyond the insurance termination date.

The law also allows borrowers with good repayment records to request cancellation of PMI when their principal balance has been paid down to 80 percent of the original property value. If the lender has a written policy permitting cancellation, homeowners may be able to demonstrate through an appraisal, that because of market appreciation, they now have a 20 percent or greater equity stake in the house.

One of the big drawbacks of the 1998 law from a consumer perspective was its emphasis on new borrowers rather than on the 5 million-plus current PMI-paying homeowners. That's why the forthcoming PMI reforms from Fannie Mae and Freddie Mac are so significant: Between themselves, the two giant companies own the lion's share of all PMI-insured mortgages in the country. As the largest beneficiaries of PMI coverage, their guidelines on when and how cancellations occur are crucial to consumers.

If their final reforms emerge as outlined last week, homeowners whose loans currently are owned by Freddie Mac will have their premium payments terminated automatically once their loan balance meets the congressional 78 percent of original value test, or at the midpoint of the loan term. Mortgage companies who service Freddie Mac can implement the change immediately or no later than Jan. 2, 2001.

Borrowers whose loans are owned by Fannie Mae will have premium payments terminated automatically at the midpoint of their loan terms. Servicers will have until Dec. 30, 2000, to adopt the Fannie Mae reform.

Both corporations say they will continue their current cancellation-by-request policies for borrowers with good payment histories who can demonstrate by appraisal that their equity stake is 20 percent or higher.

Kenneth R. Harney is a syndicated columnist. Send letters care of the Washington Post Writers Group, 1150 15th St. N.W., Washington, D.C. 20071.

Pub Date: 4/25/99

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