When Roberta and Robert Moore bought their home in 1992, they had expected to pay an extra $150 a month for private mortgage insurance because they could afford only 10% down on the $372,000 house in South San Jose.
But by last year, rebounding Northern California housing prices, along with four years of mortgage payments, had boosted the Moores' equity to about 27%, a level well above that required in most cases to have the lender drop PMI, which is a special policy that pays the lender 20% to 30% of the loan's value if you default on the mortgage.
However, getting out from under the monthly PMI premium wasn't as easy as calling their local bank branch.
"They want you to bring in their appraiser and pay their fee," Roberta Moore said. "It's like they are playing a game to garner more income they are not due. . . . It's usurious."
If you are among the one-in-four home buyers over the past few years who couldn't afford 20% down when you bought your home, then you're most likely making an added monthly payment for PMI.
But if you're like most PMI borrowers, you don't know much about this special insurance.
Lenders require PMI for low down payments because numerous industry studies have shown that homeowners with less equity have higher default rates than homeowners with more.
Lenders argue that without PMI coverage millions of buyers--many of them first-timers--would be unable to purchase a home.
By using PMI, some home buyers can also purchase more expensive homes than they could without the coverage. Young, first-time home buyers and savings-poor but income-rich buyers stand to benefit most.
There are 5 million PMI policies in effect now, according to the Mortgage Insurance Cos. of America, many of them taken out in the last five years.
PMI critics--and they are growing in number and clout--claim that PMI borrowers have been subjected to unfair practices:
* Some homeowners unwittingly pay the premiums years after it's necessary, critics claim, because lenders don't always tell customers they are no longer considered a default risk.
* Some lenders make the borrowers jump through hoops to get the insurance dropped.
* Some homeowners, because of hazy disclosure, confuse PMI coverage with mortgage life insurance, which pays for all or part of a mortgage if the borrower dies.
Home-loan lenders insist that only a small percentage of PMI holders are affected by such practices, but critics contend that as many as 20% of PMI holders are stuck with unnecessary premiums.
Several states have passed laws to force more PMI disclosure. A civil suit was settled last year in favor of tens of thousands of borrowers with PMI. And homeowners are making such a ruckus over the issue that lawmakers have gotten involved.
A bill in the House of Representatives, introduced by Rep. James V. Hansen (R-Utah), and one in the Senate, by Banking Committee Chairman Alfonse D'Amato (R-N.Y.), would require periodic disclosure of borrowers' rights to cancel their PMI, as well as the conditions of eligibility for cancellation that may apply.
The Senate bill goes even further: It would require that PMI be terminated automatically whenever the borrower's loan balance is equal to or less than 80% of the value of the home when the loan was first made.
Fannie Mae, the government-chartered company that buys mortgages from lenders and sells them to Wall Street, has announced that it will require companies that service loans it buys to disclose to consumers, at the time the loan is originated, information about PMI and how it can be canceled when certain conditions are met. That disclosure would have to be made annually as well.
The impact of Fannie Mae's action could be widespread. One in five mortgages is held by Fannie Mae. Freddie Mac (Federal Home Loan Mortgage Corp.), holding one in six mortgages, as well as others in the mortgage industry, often follows Fannie Mae's policy lead.
Both the National Assn. of Realtors and the largest state affiliate, the California Assn. of Realtors, have joined the push for PMI reform.
Meanwhile, a grass-roots movement of homeowners has taken PMI complaints to state lawmakers and private attorneys.
Minnesota, a hotbed of anti-PMI activity, has joined California, Connecticut and Maryland as states with tough laws regulating PMI costs, disclosure and cancellation rights. Wisconsin is also attempting to pass legislation.
Last year, without admitting guilt in a class-action civil suit, two subsidiaries of one of the largest banks in the country--Banc One Corp. of Columbus, Ohio--agreed to cancel PMI on high-equity loans without a request from individual borrowers.
Banc One Mortgage Corp. and Banc One, Texas, also agreed to give new borrowers disclosure statements explaining how PMI works and to annually advise customers how and when they can request cancellation of premium payments. The settlement affects 45,000 PMI-paying borrowers.
This article was adapted from a report by the Insurance News Network, an Internet news service that provides consumer journalism. INN's Web site is http://www.insure.com