Legislation has been introduced that would allow home owners with government mortgages to cancel insurance coverage once they pay down their loan balances to 80 percent of their home's original value.

The bill by Rep. James Hansen, R-Utah, would stop the Federal Housing Administration from collecting mortgage insurance premiums from borrowers who have enough equity in their homes that they no longer pose a risk to lenders.

"For far too long, the federal government has required FHA loan holders to pay millions in mortgage insurance even after the risk of loss to the government had passed," the ten-term lawmaker said. "Insuring people for a risk they do not have is just wrong."

But according to the Mortgage Bankers Association, the measure could force borrowers to pay somewhat higher insurance premiums.

Howard Glaser, the MBA's senior vice president for government affairs, would not speculate as to how much higher insurance fees might be. But noting that the FHA's is a pooled insurance fund, he said that if all borrowers no longer shared the costs and the risks, individual borrowers would have to make up the difference.

Under a bill sponsored by Rep. Hansen and signed into law two years ago, lenders must cancel private mortgage insurance coverage on conventional loans when a loan's balance reaches 80 percent of original value. But FHA insurance remains in force for the life of the mortgage.

Since the passage of the Home Owners Protection Act, the Ogden Republican said, many FHA borrowers have been asking why the law did not apply to their loans. And after looking into the matter, he has come to the conclusion there is no reason for FHA to charge mortgage insurance beyond the 80 percent level.

According to an actuarial review by Price Waterhouse, less than 1% of all FHA borrowers who reach the 80 percent standard actually default on their loan. And in most cases, when a borrower does default, no loss is incurred by either the FHA or the lender.

"Insurance should only be required when the risk warrants its purchase," Rep. Hansen said. "In the case of the FHA's Mutual Mortgage Insurance Program, FHA is forcing the people who can least afford it to pay for insurance when there is almost no risk."

Published: October 6, 2000

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