GOP Infighting Stalls PMI Reform

WASHINGTON — Legislation that would correct a problem confronting thousands of homeowners--overpayment of private mortgage insurance premiums--is stuck in a Senate committee because of a fight among Republicans.

The chairman of the Senate banking committee, Alfonse D’Amato (R-N.Y.), has been unable to convince Republican colleagues on the committee to support his bill, which would give borrowers nationwide the right to have their private mortgage insurance terminated automatically when their equity stake reaches 20% of the original loan amount.

The House passed a PMI reform bill this spring with an automatic cancellation trigger at 25% equity.

D’Amato’s committee opponents, led by Sen. Lauch Faircloth (R-N.C.), favor a version backed by the insurance industry that would impose minimal requirements on insurers and would provide federally mandated automatic cancellation point.

The result of the Senate standoff is that an estimated 250,000 homeowners across the country who would qualify for automatic cancellation of their PMI premiums continue to pay hundreds of dollars a year for mortgage insurance that neither they--nor their lenders--need.

Private mortgage insurance is one of the least understood financial products in the marketplace. Most lenders and mortgage investors--like giants Fannie Mae and Freddie Mac--require purchase of private mortgage insurance whenever a borrower finances a home with less than a 20% down payment. Premiums vary by loan size and down payment, but typically range from $40 to $75 a month.

Though paid for entirely by consumers, the insurance coverage directly benefits lenders and investors, covering them against expenses they would incur if borrowers failed to make loan payments. Home buyers or owners with a 20% or greater equity stake in their property are statistically less likely to default on their loans and end up in foreclosure. And if their loans do go to foreclosure, the losses are lower to the lender or investor.

That’s why for years, the two biggest players in the mortgage market, Fannie Mae and Freddie Mac, have permitted cancellation of PMI coverage for borrowers with good payment histories once their equity stakes reach 20%.

Neither Fannie Mae nor Freddie Mac has ever sought to communicate this cancellation option directly to borrowers, however, and federal law does not require mortgage lenders or servicers to advise borrowers at any time of their possible cancellation rights.

In fact, until Rep. James V. Hansen (R-Utah) proposed a mandatory PMI disclosure bill in the last Congress, there was virtually no public attention given to PMI as a consumer issue.

Hansen estimated that huge numbers of homeowners needlessly continue to pay premiums long beyond the point when they represent any economic risk to their lenders. In one case, Hansen found that a homeowner paid monthly PMI premiums for more than two decades, to the point when her equity stake in the property was close to 90%.

“At no time was [the owner] told that she had a right to cancel the mortgage insurance,” Hansen said. “Her mortgage company continues to charge premiums every month even though it knows that [the insurance] is unnecessary. . . .”

With no federal standards governing PMI disclosure or termination, a few states have adopted consumer protections on their own. California, New York and Minnesota, for instance, require or permit termination of coverage for certain home loans at the 25% equity level. Other states, including Connecticut, Maryland, Massachusetts and Missouri, require disclosures alerting consumers to their rights to cancel their coverage at some point.

Hansen’s reform bill, which mandates uniform PMI disclosures plus automatic cancellation at 25% equity, passed the House with an overwhelming bipartisan vote in April. D’Amato introduced his bill two months earlier and promised speedy action by the Senate.

Lobbyists for the mortgage insurers, however, expressed concern that D’Amato’s bill would expose them to new administrative burdens and financial liability.

Four of the eight national mortgage insurance companies--GE Capital Mortgage Insurance Corp., United Guaranty Corp., Republic Mortgage Insurance Co. and Triad Guaranty Insurance Corp.--are based in Faircloth’s home state of North Carolina, and they have found him sympathetic to their concerns about D’Amato’s bill.

Staff aides to Faircloth and lobbyists for the mortgage insurers did not return phone calls seeking comment on the Senate banking committee logjam.

D’Amato, in the meantime, has warned Faircloth and other Republicans that he may bypass the committee altogether to get a PMI bill to the Senate floor.

In September, if committee Republicans won’t move some version of his bill, D’Amato plans to offer the House-passed Hansen bill as an amendment to any piece of legislation pending on the Senate floor.

Senate rules allow such a maneuver, and mortgage industry experts say the full Senate--given the opportunity to vote for politically popular PMI reform--would do so by a large margin.

Distributed by the Washington Post Writers Group.