Legislators Tackle PMI Overcharges

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 in recent weeks, 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% of the value of the home at the time the loan was originally closed.

Sponsored by Senate Banking Committee Chairman Alfonse M. D’Amato (R-N.Y.), 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,” said D’Amato 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 late February, is the Senate companion to a House bill sponsored by Rep. James V. Hansen (R-Utah). Hansen 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, including liberal Democrats like Rep. Joseph P. Kennedy II (D-Mass).

Private mortgage insurance--also known as PMI--is required by most lenders whenever a borrower obtains a loan with less than a 20% down payment. The insurance protects the lender--or the ultimate purchaser of the loan, the Federal National Mortgage Assn. or the Federal Home Loan Mortgage Corp.--from loss in the event of a borrower’s nonpayment of principal and interest. Home buyers pay all the premiums for the coverage; lenders are the sole beneficiaries of any insurance payout.

But once a homeowner’s equity stake in the property exceeds 20%--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. Even if the home has to be sold at foreclosure, the insurance policy usually will cover much, or all, of the lender’s loss exposure.

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%. Hansen cites the case of one unsuspecting homeowner who was still being charged for PMI premiums when her equity was 90% of her home value.

An eye-opening new estimate of the extent of the problem came recently when a Dallas-based loan portfolio analyst said he believes that as much as one-fifth of some lenders’ mortgage portfolios consist of PMI-insured loans with equities over 20% of current market resale value.

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Lewis Hill, president of First American Tax Valuation Co., said in an interview that in one recent analysis of a 20,000-loan portfolio he performed, PMI was still being collected on about 4,000 loans where the assessed property valuation of the home put the borrowers’ equity at or above the 20% 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 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 firms have provided guidance on PMI cancellation to their loan servicers--the mortgage companies that collect the monthly payments and administer the millions of home loans owned by the congressionally chartered giant investors. Both companies generally allow qualified borrowers who can demonstrate equity levels of 20% or more to apply for premium cancellations.

But neither firm has sought to require its servicers to educate borrowers directly about the mechanics or eligibility standards for cancellation. Late last year, Fannie Mae took the first steps toward such a pro-consumer stance. In a confidential memorandum circulated to a small group of mortgage industry executives, it proposed an automatic cancellation and annual disclosure program similar to the one outlined in D’Amato’s bill.

Representatives for Fannie Mae and Freddie Mac have said they support the objectives of theD’Amato bill. The bill’s disclosure and automatic cancellation provisions would take effect 180 days after enactment of the legislation--raising the possibility that thousands of homeowners across the country could benefit from the new rules later this year.

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Distributed by the Washington Post Writers Group.