A new federal law will force lenders to cancel mortgage insurance when a homeowner achieves equity in his home worth 22 percent of the original purchase price. All that awaits the law's enactment is the expected signature of President Clinton.

The new law, the Homeowners Protection Act of 1997, will amend the Federal Truth in Lending Act and save some homeowners more than $1,000 a year in PMI payments.

Congress last week approved SB 318, which will apply to mortgages signed beginning one year from the date the president signs the measure.

PMI, which protects lenders from borrowers defaulting on the mortgage, is required on most loans with down payments of less than 20 percent. That's because borrowers making smaller down payments are more likely to default than those with larger down payments.

"Mortgage insurance is a valuable financial tool that helps people get into homes years sooner than they would otherwise," said Suzanne C. Hutchinson, executive vice president of the Mortgage Insurance Companies of America. "But we don't want anyone to pay for it longer than it is needed," she said.

The insurance carries no protection for borrowers who must pay for it, nor is it tax deductible. Lenders generally disclose how borrowers can cancel PMI when the mortgage is written, but later they don't always tell borrowers when PMI coverage is no longer necessary, according to consumer groups that lobbied for the new law.

Some homeowners, including legislators on Capital Hill, have unnecessarily paid PMI premiums years longer than necessary. "It is unconscionable to put American home owners on an unnecessary treadmill that adds hundreds of dollars to a family's housing costs each year," said Michelle Meier, Consumer Union's counsel for governmental affairs.

Each year, nearly 100,000 Californians alone purchase PMI ... at about $40 to $100 a month ...to obtain a mortgage, according to California State Assemblyman Kevin Shelley, (D-San Francisco), who wrote California's PMI removal law ... the nation's strongest, before the new federal bill was passed.

The key provision in the new law forces lenders to automatically cancel PMI when a homeowner pays his or her mortgage balance down to 78 percent or less of the home's original purchase price.

"This PMI reform bill is welcome news to hard-working Americans who won't have to pay thousands a year for phantom mortgage insurance," said US. Senator, Alfonse M. D'Amato (R-New York).

Home owners also may apply to have the insurance removed when the mortgage bill drops to 80 percent of the original value. The two provisions require that the borrower be current with his or her mortgage payments.

The new law doesn't exempt stronger state laws, but when the federal law takes effect it will take precedence over weaker state laws. Meanwhile, PMI laws in Connecticut, Maryland, Massachusetts, Minnesota, Missouri, New York, Texas, as well as California, remain effective.

Depending upon the law -- state law or the new federal one -- cancellation rights don't apply to all loans. Certain mortgages, including some low-down-payment loans through Fannie Mae, Freddie Mac and those from the Federal Housing Administration and the Veterans Administration are often exempt. Some private lenders also offer there own PMI removal provisions.

Borrowers are wise to continue to check with their lender -- before they sign on the dotted line -- to determine what rules apply in their case. Hopefully lenders will simply begin to comply uniformly with the new federal legislation. "That would be best for consumers," said Donna Reichle, spokeswoman for the Community Associations Institute, which lobbied to make sure the new law applies to all homeowners including those in common interest developments.

For full text of the new federal law, Senate Bill 318, search the Thomas Guide to Legislative Information on the Internet at:
http://thomas.loc.gov.

A broader scope of the PMI issue is discussed on the Insurance News Network at:
http://www.insure.com/home/pmi1.html
http://www.insure.com/home/pmi2.html
http://www.insure.com/home/pmi3.html

Published: July 24, 1998

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