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Capitol Connection
It isn't dead, but Congress has successfully shortened the life expectancy of an insurance that adds hundreds of dollars to the monthly mortgage payments of cash-strapped homeowners.
In late July, Congress quietly passed and President Clinton signed the Homeowners Protection Act of 1998. The law requires mortgage companies to notify homeowners who purchased their homes with (PMI) private mortgage insurance when they can legally shed this pesky payment.
For the past 40 years, PMI has allowed consumers to get a mortgage even if they couldn't afford the 20% down payment that most lenders require as a minimum investment. PMI is supposed to protect the lender and the investors who later buy and service the mortgages. It's required when you borrow more than 80% of a homes value to purchase it.
In 1996, about half of all new mortgages were saddled with mandatory (PMI) private mortgage insurance because the down payment was less than 20%.
Over time, PMI adds thousands of dollars to the cost of home ownership. According to the Congressional Research Service, PMI adds $65 a month to a $100,000 mortgage in which the borrower put down only 5%. For homeowners who put down 10% on that same loan, it adds about $43 a month.
A silent cost
The problem with PMI is that banks have not been required to automatically cancel the insurance when your mortgage balance falls below 80% of the loan principal. Many people continue to pay PMI months and even years beyond the date when it should have been canceled. In testimony before Congress, MGIC, a major private mortgage insurer, estimated that at least 250,000 homeowners are now overpaying on PMI.
The new law provides that when the outstanding balance of your mortgage reaches 80% of the value of your home at your mortgage's inception, you have the right to cancel your PMI policy. The lenders base their 80% projections on your required payment schedule. If you make additional payments that would result in reaching the 80% level sooner, you have to track that yourself.
Even if you do nothing at all, your mortgage company is supposed to automatically cancel all requirements for PMI once your outstanding balance on the original loan principal reaches 78%.
Good payment history important
The new law won't save you money, though, if you don't have a good payment history on your mortgage. If you don't meet the good payment history requirements, your mortgage company can delay the PMI cancellation.
Here's how the law defines a good payment history:- You cannot have had any mortgage payments that were 60 days or longer past due in the two years before you request cancellation.
You can't have made any mortgage payments more than 30 days past due in the previous year before requesting cancellation.
High-risk mortgages
A controversial provision in the new law permits banks and mortgage companies to delay the cancellation of PMI if, at the inception of the mortgage, the lender determines that the loan would be high risk," as defined by agencies such as the Federal National Mortgage Association.
Michelle Meier, counsel for governmental affairs at Consumers Union, says that this provision could give lenders excuses to keep forcing consumers to pay PMI insurance when it's no longer necessary.
"Creating a loophole for so-called 'high risk' loans violates the spirit of this legislation," she said. "The whole point here is to define the level where a homeowner has built up enough equity in their home to eliminate the need for this extra housing expense. This loophole will continue to force homeowners to pay unnecessary insurance premiums."
The complaints have prompted a study by the General Accounting Office. In two years, the comptroller general is supposed to submit a detailed study of the impact of the high-risk mortgage exclusion from the general PMI cancellation rules. In particular, the GAO will study whether this provision affects low-income and minority homeowners.
There is a catch to all this good news for consumers, however. The new law applies only to those mortgages issued after July 1999. So if you're rubbing your hands waiting for that extra income from a reduced mortgage, maybe you should consider checking on its status yourself. The law always has allowed homeowners to request PMI's cancellation once their equity stakes reach 20%.
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