House Panel Gives PMI Borrowers Hope

A consensus legislative solution to one of the hottest consumer controversies of 1997--widespread overpayment of private mortgage insurance premiums by unsuspecting homeowners--emerged on Capitol Hill recently.

In a bipartisan vote, the House banking committee approved a bill March 20 that would for the first time force the mortgage lending industry nationwide to automatically cancel mortgage insurance policies whenever a borrower’s equity stake in the home reaches 25%.

The equity level would be measured against the value of the home at the time the loan was closed. To qualify for the automatic termination, borrowers would only have to be current on their monthly mortgage payments. They would not have to make a formal request to the lender.

Under current federal law, lenders and loan servicers may collect mortgage insurance premiums for years beyond the point where the lender is at economic risk of loss due to default or a foreclosure. Overpayments by homeowners range into millions of dollars a year, according to congressional estimates.

Private mortgage insurance is required by most lenders when a borrower obtains a home loan with less than a 20% down payment. The insurance typically costs anywhere from $40 to $100 a month. Federal government mortgage insurance, as for Federal Housing Administration (FHA) or veterans (VA) loans, would not be covered by the new legislation, nor would mortgages with PMI paid by lenders.

The 25%-equity automatic-cancellation standard approved by the committee is less favorable for consumers than the 20% equity standard proposed in a companion bill pending in the Senate. It is also less generous than one proposed last year by Fannie Mae, the giant congressionally chartered mortgage investor. In a confidential memorandum, a top Fannie Mae official suggested a 20% equity automatic-cancellation trigger on a 30-year loan, provided the mortgage was at least 10 years old. Under the House bill’s trigger, PMI coverage would terminate automatically at year 12 on a $100,000 loan with a 10% down payment.

The House bill would not prohibit qualified borrowers from applying to their mortgage companies for termination after demonstrable increases in the value of their properties caused by renovations or market appreciation.

The bill has extensive disclosure provisions, scheduled to take effect a year after enactment, to improve consumer awareness of PMI, how it functions and how to get rid of it. Under current law, most consumers receive no formal description of the mortgage insurance product they are buying, despite its considerable annual expense.

Millions of homeowners already paying for PMI would also begin receiving annual disclosures about their insurance coverage and the procedures for cancellation. The bill prohibits lenders or mortgage servicing firms from charging consumers fees for any of these disclosures.

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The House bill, originally written by Rep. James V. Hansen (R-Utah), is expected to go to the full House floor for a vote sometime this spring. The Senate bill, sponsored by Sen. Alfonse D’Amato (R-N.Y.), is expected to be reported out of the banking committee after the Easter recess.

Assuming that both houses pass compromise legislation in the next three months, what will the law mean in practical terms?

For as long as one year, not much. The lending industry says it needs that much time to gear up its computer systems to provide the disclosures to homeowners and new buyers required by the legislation.

Even after a year, the law won’t change anything for loan applicants who sign documents committing them to pay insurance for the life of the loan. These include all purchasers using FHA, VA and lender-paid PMI programs.

Another issue to watch for under the new law: appraisals and what they cost.

Because many homeowners will continue to be allowed by the owners of their mortgages--such as Fannie Mae, Freddie Mac and other investors--to apply for cancellation before any automatic trigger point, what property valuation techniques will be permitted? Say your house has jumped in value sharply and you believe you now have better than the required equity stake. Will you have to obtain a full appraisal, at a cost of $200 to $300? Or will companies like Freddie Mac and Fannie Mae let you use the far less expensive electronic “collateral assessment” database technology that they use themselves to establish property values, often at costs under $25 per property?

For example, Experian Inc. (formerly TRW) already offers electronic property reports directly to consumers via the Internet at $10.95 to $17.95: www.experian.com A spokeswoman for Freddie Mac said, “We are looking into” permitting alternative lower-cost property valuation methods in connection with PMI cancellation requests. A spokesman for Fannie Mae had no immediate answer.

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Distributed by the Washington Post Writers Group.