Congress Renews Push to Reform PMI Rules

If you’re one of the estimated 250,000 American homeowners paying unnecessary premiums for private mortgage insurance, congressional Republicans and Democrats have a strong, bipartisan message for you:

Don’t give up on us in this election year. Before we come home to face the voters, we’re going to fix the costly, long-simmering problem of mortgage insurance.

That, at least, is the current word on Capitol Hill, where legislators are still embarrassed by their failure to pass a popular reform bill last year.

Even though both the Senate and the House had approved PMI measures by overwhelming majorities, negotiators for the two houses couldn’t agree on a compromise package before adjournment in late November.

The net result of the failure was to leave large numbers of homeowners nationwide stuck paying monthly insurance premiums for coverage they don’t need. The approximate cost per year for many of those households runs from $500 to $1,000.

Private mortgage insurance generally is required by lenders when they make home loans with down payments under 20% of the purchase price of the house. Premiums are paid by the borrower, but the insurance protects only the lender from loss in the event of delinquency or foreclosure by the borrower.

PMI is different from FHA insurance, which only covers home loans backed by the Federal Housing Administration. The country’s two secondary market lenders, Fannie Mae and Freddie Mac, generally permit homeowners with good payment histories to request cancellation of PMI premiums when their equity stakes exceed 20%, whether by principal pay-down or through an increase in the market value of their property.

Other lenders decline to terminate PMI coverage, citing boilerplate language in their mortgage documentation requiring insurance for the life of the loan.

Since the statistical likelihood of loss to any lender declines sharply once a borrower’s equity reaches the 20% to 25% level, California and a few other states have required cancellation of PMI policies for borrowers who can demonstrate that they meet that standard. But the vast majority of homeowners enjoy no legal protections on PMI.

Furthermore, because they are rarely informed by lenders about the possibility of requesting termination, large numbers of homeowners continue premium payments for years beyond what’s economically necessary for the lender.

The PMI industry itself estimates 250,000 homeowners are in this position, but advocates of PMI reform, such as Sen. Alfonse M. D’Amato (R-N.Y.), believe the number is considerably higher.

Both the reform bills passed last year would require lenders nationwide to automatically terminate PMI coverage whenever a homeowner’s equity in the property reaches a specified trigger point--25% in the House bill, 22% in the Senate’s.

The Senate bill also would allow homeowners with good payment records who have reduced their principal debt to 80% of the original value of the house to request cancellation of PMI.

Unlike the House version, however, the Senate bill contained no provision for homeowners to request cancellation based on growth in their equity due to appreciation in their home’s appraised resale value.

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The Senate bill, but not the House version, would restrict PMI cancellation rights for certain borrowers who obtain “affordable” low-down-payment loans through Fannie Mae and Freddie Mac.

Considered higher risks by insurers and lenders, such borrowers would become eligible for PMI termination only at the “half-life” point in their loans--that is, at 15 years on a 30-year mortgage.

A final key difference between the two bills: The Senate would preempt virtually all state laws on PMI except New York’s, the home state of banking committee chairman D’Amato. That was considered unacceptable by congressional representatives from California, where state law already offers PMI protections.

Negotiators for both the House and the Senate now say, however, that they are optimistic that an acceptable compromise PMI reform bill can be cobbled together and passed this spring.

The compromise is likely to be based primarily on the Senate bill, with modifications to deal with House members’ concerns about federal preemption of state laws and definitions of “high-risk” borrowers.

Congressional staff sources say any final bill will probably also provide an option for borrowers to submit appraisals to demonstrate growth in resale--and equity--values.

Although negotiators prefer not to talk on the record prior to hammering out an actual PMI compromise deal, one lobbyist who is close to the issue confirmed that the outlook is good.

“We are very encouraged,” said Frank Torres III, legislative counsel for Consumers Union, “that there appears to be a real desire to do something about PMI.”

Assuming that happens before summer, mortgage borrowers and homeowners can look forward to new, nationally uniform disclosures informing them about how--and when--they can finally stop paying for PMI.

Distributed by the Washington Post Writers Group.