Field levels on mortgage insurance

Nation's Housing

April 29, 2001|By KENNETH HARNEY

IN A STRONG, pro-consumer move, the Bush administration has decided to allow automatic termination of mortgage insurance premiums for new customers using the nation's largest source of federal home loan money.

The decision, not yet formally announced but scheduled for implementation this summer, effectively provides homebuyers under the Federal Housing Administration mortgage program equal treatment with borrowers in the conventional marketplace who pay private mortgage insurance premiums, known as PMI.

Consumers who closed FHA mortgages from Jan. 1 onward now will be able to stop paying insurance premiums when their equity stakes reach 22 percent of the original sales price of the home. That equity level can be achieved either through regular amortization of the loan over a period of years or through additional payments toward the principal balance.

The policy decision, confirmed April 20 by Housing and Urban Development Secretary Mel Martinez, essentially endorses a promise made by the Clinton administration late in last year's presidential campaign. Many of Clinton's election-eve regulatory moves were put on hold by the incoming Bush administration. Mortgage insurance industry leaders assumed the premium termination concept was on ice, perhaps permanently.

But Martinez said automatic premium terminations are "good for the American homebuyer who has relied on FHA" - predominantly moderate-income households making their first home purchase with a small down payment. About 1 million borrowers use the FHA home mortgage insurance program per year.

1998 legislation

In 1998, Congress mandated that homebuyers using private mortgage insurance be relieved of monthly premium payments once they reach the 22 percent equity level.

The same law, however, denied FHA borrowers the same consumer protections. Mortgage premiums can be expensive - $40 to $70 or more per month in many cases - and can put a strain on tight family budgets.

Insurance premiums serve to cover the risk of financial loss by the FHA in the event of a serious default on the mortgage. As a practical matter, however, the risk of loss declines as the homeowner's equity stake increases. Equity of 20 percent to 25 percent is generally thought to be sufficient to eliminate all or most of the risk.

Before Congress acted, borrowers in the conventional marketplace with equity stakes of 30 percent to 40 percent or more frequently were paying PMI premiums long beyond the point of any real risk of a foreclosure loss.

The HUD policy change taking effect this summer will work like this: All loans closed after Jan. 1, 2001, will carry the automatic premium termination feature, including the precise date at which lenders should stop collecting premiums based on the scheduled amortization of principal.

Speeding up the process

Borrowers who wish to speed up that process through additional payments of principal will be able to apply for premium termination in advance of the automatic cut-off date, but not during the first five years of a 30-year mortgage.

The new administration's move on mortgage insurance premiums sends a soothing message that it intends to maintain the FHA program as a competitive alternative for the buyers who need it.

The move also signals that the new administration sees the FHA as a key vehicle for raising homeownership rates for African-Americans, Hispanics and other minorities.

More so than the conventional market, FHA borrowers tend to be minority and young, and they often have credit histories and debt-to-income ratios that require hands-on, empathetic underwriting.

Before the Clinton administration's promise to extend automatic premium cancellation rights to FHA borrowers, some congressional critics had wondered aloud why the federal government effectively discriminated against FHA customers, given their demographics.

Rep. James V. Hansen, a Utah Republican, introduced a bill that would have forced HUD to treat FHA homebuyers the same way it treats buyers using PMI.

Now that legislation won't be necessary.

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

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