Congress Drops Ball on PMI Reform

WASHINGTON â€”  The failure of Congress earlier this month to pass reform legislation on one of the hottest consumer issues in real estate--overpayment of private mortgage insurance premiums by homeowners--raises serious questions about whether legislative relief will be possible during 1998, a year in which the entire House is up for reelection.

It also raises practical questions for millions of homeowners who already are paying PMI premiums but may be unclear about how and under what conditions they can terminate their mortgage insurance policies.

To help answer those questions, here’s a quick update on the PMI issue as Congress left for recess:

After nine months of work, why didn’t Congress produce the reform package that leaders in both houses promised in 1997?

Ironically, both houses did pass far-reaching PMI reform bills. Both bills would have required lenders for the first time to cancel PMI coverage and payments once a homeowner’s equity in the property reached a certain point--25% in the House version, 22% in the Senate’s.

In the closing hours before recess, however, House Democrats declined to accept the Senate’s PMI bill, which had passed the Senate by a unanimous vote. Democrats on the House Banking Committee objected to several features of the Senate bill, particularly the preemption of virtually all state consumer-protection statutes on PMI.

What’s the outlook for some sort of compromise in 1998?

Dubious. In the words of Michelle Meier, Consumers Union’s top Capitol Hill lobbyist on the issue, “We might have missed our best chance� for reform when Congress went home for the rest of 1997.

In part, that’s because PMI has begun metamorphosing into a partisan political controversy on the House side--never a good development in a congressional election year. But the possibility exists that Republicans and Democrats will get together in conference and produce a compromise before mid-1998.

In the absence of federal reforms, what rights do homeowners have to get rid of PMI?

Consumers in New York, Minnesota and California have state legislative protections and should inquire about termination procedures with state banking or mortgage regulatory agencies.

But the vast majority of Americans with PMI must look to the language of their own mortgage notes to determine whether they are permitted to request PMI cancellation at any point.

Homeowners whose loans are owned by Fannie Mae or Freddie Mac, the secondary mortgage market companies, and who have good repayment histories may be able to request cancellation when their equity in the property hits 20%, either through loan amortization (pay down) or through appreciation in property values.

What about people with Federal Housing Administration loans?

FHA-insured borrowers have to pay premiums for the duration of their loans. Neither bill would change that rule. It’s one of the little-advertised disadvantages of FHA loans.

Would the pending federal bills allow all homeowners to request PMI cancellation because of appreciation in the market value of their homes?

This is a contentious point. The Senate bill would allow consumers to request cancellation of their PMI payments only when they have paid down 20% of the original value of the house.

There is no provision for consumers to cite the increased market resale value of their property--whether through inflation or through capital improvements--as the basis for a cancellation request.

The House bill, in contrast, specifically allows the use of appraisals when the owner of the mortgage--say, Freddie Mac or Fannie Mae--takes market value appreciation into account in granting PMI cancellations. But even the House bill creates no independent right for consumers to use market value data if the loan owner doesn’t expressly permit it.

If homeowners can request only PMI termination on the basis of principal pay down of the loan balance to 80% of the original home value, doesn’t that hurt consumers when home values are rising?

Absolutely, and it’s a serious drawback in both bills, but especially in the Senate’s.

Here’s an example based on estimates provided to Congress by the Council of Appraisal and Property Professional Societies.

Say you have a house with a $125,000 30-year fixed-rate mortgage at 8 1/2% and an automatic PMI termination feature when your equity hits 20% of the property’s original value. Under this scenario, the homeowner’s PMI premium payments wouldn’t end until the 14th year.

By contrast, assuming the same loan terms but a PMI-cancellation formula allowing consideration of current market value, an owner whose property appreciated by 3% a year could terminate in the seventh year. That’s half the time required under the Senate bill approach, which allows no consideration of market value increases.

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Distributed by the Washington Post Writers Group.