Home Loan Insurance Reform in Limbo
Long-awaited federal consumer protections for homeowners with private mortgage insurance almost squeaked through Congress in the closing hours before the Memorial Day recess.
But for the second time in six months, House and Senate members headed home without completely resolving this sticky, contentious and expensive issue.
For the high number of homeowners who continue to pay premiums of $700 to $1,000 a year or more for mortgage insurance, here’s an update on Capitol Hill’s not-quite-ready-for-prime-time reforms:
Private mortgage insurance--as distinct from Federal Housing Administration loan insurance--is required by most lenders whenever a borrower obtains a mortgage with less than a 20% down payment.
Low-down mortgages have higher default and foreclosure loss rates than loans with larger down payments, and the insurance coverage protects the lender against all or part of that risk.
Though private mortgage insurance (PMI) has enabled millions of cash-short borrowers to become homeowners, it has also had a fundamental flaw:
Many borrowers have continued to pay PMI premiums for years beyond the point at which their equity stakes in their home exceeded the 20% standard.
Some homeowners with 30% and 40% equity in their property are still paying PMI premiums every month, even though they represent no economic risk of loss to the lender.
They continue to pay, in part, because neither their lender nor their mortgage insurer is under any current federal legal obligation to tell them that they can stop.
Only three states--New York, California and Minnesota--require lenders to provide consumers with disclosures of their right to request and obtain termination of PMI coverage.
The pending federal reform legislation would correct most of this by forcing mortgage lenders nationwide to terminate PMI premiums automatically whenever a homeowner has paid down the loan to an equity “trigger” level--22% of the original home value for most borrowers, and 23% for certain “high risk” borrowers.
The legislation would also allow a borrower with a good payment history who has reduced the principal debt to 80% of the original value of the house to ask for cancellation of PMI.
Finally, the bill would create a new, mandatory consumer information system for PMI. All lenders would have to explain to customers with PMI precisely what their rights to cancellation are, and how and when termination could occur.
The issues that blocked action on the reform package at the Memorial Day recess range from states’ rights to the rights of borrowers deemed “high risk.”
States with PMI cancellation statutes already on the books don’t want the new federal statute to preclude them from enforcing their laws, or toughening them in the future.
Senate negotiators agreed to this, but the House wants the protection from federal preemption extended to other states--including Maryland, Massachusetts, Colorado and Mississippi--which have their own disclosure rules, but not termination requirements, already in effect.
The idea here is that these states should be free to enact even tougher consumer protections than any federal standard. Insurers and lenders are vigorously opposed, arguing that the more state rules they have to deal with, the higher their costs of doing business.
High-risk borrowers represent probably the biggest hurdle confronting negotiators at the moment. Under the Senate bill, home buyers using certain low-down programs sponsored by Fannie Mae and Freddie Mac would be subjected to a tougher standard for automatic termination of PMI. Their loans would only be eligible for termination at their “half-life”--after 15 years of principal payments on a 30-year mortgage, for example.
Groups such as Consumers Union, the National Consumer Law Center and the American Assn. of Retired Persons think this unfairly discriminates against an entire class of borrowers, the majority of whom are likely to pay their mortgage bills on time.
Plus, they say, the determination of risk is put entirely in the hands of nongovernmental, private companies--Fannie Mae and Freddie Mac.
Rep. Bruce Vento, D-Minn., a PMI reform advocate, says the bill still “needs specific criteria and guidelines” defining what constitutes high risk.
Otherwise, he says, Fannie and Freddie would be free “to declare lots of things high-risk,” and require credit-worthy, moderate income, first-time home buyers to pay PMI premiums for longer than most other borrowers.
The outlook for PMI reform? Stay tuned this month when Congress returns from recess. It’s a congressional election year, and the incumbents don’t want to go home empty-handed again.
