Tuesday, July 14th, the House of Representatives approved a NAR-supported bill that would save many homeowners hundreds upon thousands of dollars a year in unnecessary mortgage insurance premiums. That would be a welcome relief to private mortgage insurance premium payers, who grew by over 1 million last year alone.

In the past, it was not possible to purchase a home without a credible down payment. Instant equity was provided by the borrower, who put as much as 20% down on a new home. A large down payment protected the lender in two ways. The owner was proven more likely to pay the mortgage, and in the event of default, the home could be sold at a price that would insure the lender's investment recovery.

But as our economy became more credit-based, the real estate and mortgage industries had to find a way to allow more people to become homeowners, without coming up with 20% down. Mortgage insurance was the answer.

Mortgage insurance is a stipulation that is imposed by lenders who are lending new homebuyers more than the standard 80% mortgage amount. With more first-time homebuyers and more move-up buyers needing help with large downpayments, this means was created to help them do so. Lenders began to offer a first and second lien package which would allow the borrower to qualify with little money down. But the price was that the borrower would have to purchase mortgage insurance that would take the place of the missing 20% equity until the home had built equity.

But problems arose when homeowners discovered that getting their lenders to establish when the equity position had reached 20% was academic at best and capricious at worst. Armed with real estate comparables, appraisals and inspections, many found lenders reluctant to allow private mortgage insurance policies to be canceled. Many found themselves paying the mortgage insurance premiums long past the point of 20% equity build-up. Mortgage insurance can add as much as $75 to $125 to the monthly payment of the mortgage, without reducing the principal or adding to the equity in any way.

So what had been a boon to the industry, now had created a monster.

"At long last we'll stop the rape and pillage of the little people who are paying an outrageous cost for phantom protection," declared Senator Alfonse D'Amato, R-NY., and chairman of the Senate Banking Committee.

The Senate is expected to pass the bill soon, according to D'Amato and then President Clinton is expected to sign the bill which would automatically cancel PMI when a homeowner's equity reaches 22% of the original value of the home and inform borrowers of their right to request PMI cancellation when their equity reaches 20%.

Some high risk buyers may be required to keep their mortgage insurance premiums until the 20% equity position has been reached. High risk scenarios are borrowing the 20% or less from another source besides the mortgage lender.

Published: July 15, 1998

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