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Bill Would Eliminate Unneeded Payment

July 21, 1996|KENNETH R. HARNEY | SPECIAL TO THE TIMES

WASHINGTON — Does it make sense for thousands of home buyers across the country to sign up for insurance payments they really don't understand, don't need to pay and don't know how to stop?

That's a question Rep. James V. Hansen (R-Utah) posed last month to his House colleagues when he circulated his new bill, the "Private Mortgage Insurance Consumer Protection Act" (H.R. 3556). Hansen wants to amend the federal Truth-in-Lending Act to force lenders to explain to borrowers upfront how and when to cancel their mortgage insurance premiums--saving them $50 to $100 a month in many cases.

Under the current system, Hansen believes, homeowners are paying millions of dollars a year in premiums for insurance protection nobody needs.

Hansen cites the case of a Texas woman to illustrate the problem he's trying to cure. Nearly 20 years ago, he says, the woman bought a modest-price home. Because she couldn't come up with a 20% down payment, her lender required her to buy a mortgage insurance policy to protect the lender from loss in the event of her default and subsequent foreclosure.

Like most home buyers, according to Hansen, "at no time was she told that she had a right to cancel the mortgage insurance" once her equity stake in the home exceeded 20%. Two decades later, with an equity stake almost 90% of the market value of the home--that is, her loan represents just 10% of the resale value of the property--she and her husband are still paying monthly mortgage insurance premiums.

"Her mortgage company continues to charge them premiums every month even though it knows that [the insurance] is unnecessary," says Hansen. Even if the house had to be sold tomorrow to pay back the outstanding loan, the sales proceeds would be far more than what is needed to cover the costs.

The excess mortgage insurance problem is complex, in Hansen's view. On the one hand, the insurance is a genuine service to large numbers of cash-short home buyers who wouldn't be granted low down payment mortgages without some form of loss protection for their lenders.

On the other hand, private mortgage insurance too often is like a water spigot that nobody turns off. Lenders and mortgage servicers are not required to notify borrowers when their equity stakes in their homes exceed the amount needed to cancel coverage. And borrowers are uninformed about their rights to stop paying premiums.

When they inquire, according to Hansen, their mortgage servicers often aren't helpful, suggesting that they hire a professional appraiser for $500 or more, send in the report and hope for the best. In most states, there's no legal requirement that even if the borrower meets all the tests to permit cancellation of the policy, the lender or mortgage servicer must then do so promptly.

A few states, including California, Maryland, Connecticut and New York, have statutes that provide cancellation protections to borrowers, according to Ellen Schweppe, spokeswoman for the Mortgage Insurance Cos. of America, the industry's national trade group.

Hansen's bill would attempt to educate consumers about their cancellation rights at the front end of the mortgage process and at least once a year thereafter. It would require mortgage lenders to provide a notice along with other mandatory truth-in-lending disclosures describing the conditions under which the borrowers could request termination of their premium payments to the lender. The conditions might include the loan-to-value ratio threshold (e.g., 80%), plus the lender's requirements for updated appraisal information on the home.

The bill would also require the lender or mortgage servicer to include similar cancellation disclosure information, including the address and phone number of the office to contact, along with its annual account statement. No charges could be imposed on the consumer for furnishing this information, the bill stipulates.

Hansen hopes to attach his bill to a larger banking reform legislative package heading for floor action in the House. No financial trade group has come out against it to date--including the politically influential mortgage insurers--giving the bill at least a fair shot at passage this session.

What's the significance of all this for you as a borrower?

For starters, if you pay mortgage insurance premiums, you need to learn about your rights to request cancellation. After all, why pay $600 to $1,000 a year for no reason?

Be aware, too, that if either of the American mortgage giants--Freddie Mac or Fannie Mae--owns your loan, your mortgage servicer may not be allowed to refuse your request for cancellation if you meet the loan-to-value criterion and you've got a good repayment history. Freddie Mac's rule, for instance, specifies that the servicer "must" cancel if you request it and meet all criteria.

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Distributed by the Washington Post Writers Group.

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