A little-noticed change in the regulations of a key government housing agency could save many homeowners thousands of dollars in mortgage insurance payments over the life of their loans.
The change, made by the Federal National Mortgage Assn. in March, allows homeowners to cancel their monthly private mortgage insurance payments if they can prove that the equity in their home is at least 20% of the home's current value.
Only borrowers whose loans have been sold to FNMA, commonly called Fannie Mae, are affected by the change. Homeowners whose loans have been kept in their lender's portfolio aren't eligible.
The exact number of homeowners who can take advantage of the change in regulations is not known, but since Fannie Mae bought nearly 900,000 home loans last year alone, the number is substantial.
Most lenders require borrowers to buy private mortgage insurance, or PMI, for any loan where the down payment is less than 20% of the purchase price. Since low down payment loans can be risky, PMI is charged to protect the lender's interest if the borrower defaults. The insurance premium on a $100,000 loan is about $29 a month, or $348 a year.
Fannie Mae buys mortgages from lenders and then uses them as collateral for securities the agency sells to investors. This process gives lenders the cash they need to make new loans.
Formerly Only Request
For several years, Fannie Mae has required lenders to allow borrowers to cancel their PMI premiums when the balance of their mortgage has been paid down to 80% of the original loan amount. However, the agency only requested that lenders cancel the PMI if a borrower produced a new appraisal indicating that the mortgage balance was below 80% of the current value of the property.
Some lenders refused to honor the request.
The change in regulations means that if a borrower can prove his loan balance is 80% or less of the property's current value, the lender must cancel the PMI premium if the loan was sold to Fannie Mae.
Pay for Appraisal
According to Judith Dedmon, a Fannie Mae vice president, homeowners should first ask their lender whether their loan has been sold to Fannie Mae. Lenders with highly automated systems should be able to answer that question over the phone, she said, although others may need a few days.
Next, the borrower must pay for a lender-approved appraiser to inspect the property. The appraisal will cost about $175, and the borrower must pay for it regardless of whether the PMI is eventually waived.
If the new appraisal shows that the loan on the property represents 80% or less of the home's current value, the borrower should then formally request that the monthly mortgage-insurance premium be canceled.
"If you've met all these requirements, and have a good payment record, the lender must--and that's a must--cancel the PMI," Dedmon said.
The Federal Home Loan Mortgage Corp., an agency that acts much like Fannie Mae, had earlier adopted similar guidelines. However, Freddie Mac insists that the loan be at least seven years old before the PMI can be canceled--regardless of the borrower's equity stake.
This requirement disturbs the California Assn. of Realtors, a trade group that played a role in getting Fannie Mae to change its PMI policy. Realtors say Freddie Mac's seven-year rule discriminates against some post-1978 buyers who originally made a small down payment, but whose property has since appreciated substantially.
"The age of a loan isn't the sole determinent of a lender's risk exposure," said Richard J. Rosenthal, CAR president and a Venice broker. "If you've got a 20% equity stake in your home, then you shouldn't have to pay PMI, period."
Bill Thomas, Freddie Mac's executive vice president, defends his agency's requirement by saying that homeowners run the biggest risk of defaulting in the early years of their loan.
"It takes a while before a mortgage is seasoned," Thomas said. "We've looked at the loans where the borrower has had problems, and those problems usually crop up in the first five to seven years." As a result, he said, Freddie Mac believes that forcing a borrower to buy PMI for at least seven years is a prudent safeguard against possible defaults.