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Insurance Cutoff Lowers the Entry Fee


WASHINGTON — In a pro-consumer move, the Bush administration has decided to allow automatic termination of mortgage insurance premiums for new customers using the nation's largest source of federal home loan money.

The decision, not yet formally announced but scheduled for implementation this summer, effectively provides home buyers under the Federal Housing Administration (FHA) mortgage program equal treatment with borrowers in the conventional marketplace who pay private mortgage insurance (PMI) premiums.

Consumers who closed FHA mortgages from Jan. 1 onward now will be able to stop paying insurance premiums when their equity stakes reach 22% of the original sales price of the home. That equity level can be achieved either through regular amortization of the loan over a period of years, or through additional payments toward the principal balance.

The policy decision, confirmed by Housing and Urban Development Secretary Mel Martinez on April 20, essentially endorses a promise made by the Clinton administration late in last year's presidential campaign.

Many of Clinton's election-eve regulatory moves were put on hold by the incoming Bush administration. Mortgage insurance industry leaders assumed the premium termination concept was on ice--perhaps permanently.

But Martinez said automatic premium terminations are "good for the American home buyer who has relied on FHA'--predominantly moderate-income households making their first home purchase with a small down payment.

Approximately 1 million borrowers use the FHA home mortgage insurance program per year.

In 1998, Congress mandated that home buyers using private mortgage insurance be relieved of monthly premium payments once they reach the 22% equity level. The same law, however, denied FHA borrowers the same consumer protections.

Mortgage premiums can be expensive--$40 to $70 or more per month in many cases--and can put a strain on tight family budgets.

Insurance premiums serve to cover the risk of financial loss by the FHA in the event of a default on the mortgage. As a practical matter, however, the risk of loss declines as the homeowner's equity stake increases. Equity of 20% to 25% is generally thought to be sufficient to eliminate all or most of the risk.

Before Congress acted, borrowers in the conventional marketplace with equity stakes of 30% to 40% or more frequently were paying PMI premiums long beyond the point of any real risk of a foreclosure loss.

The HUD policy change taking effect this summer will work like this: All loans closed after Jan. 1, 2001, will carry the automatic premium termination feature, including the precise date at which lenders should stop collecting premiums based on the scheduled amortization of principal.

Borrowers who wish to speed up that process through additional principal payments will be able to apply for premium termination in advance of the automatic cut-off date, but not during the first five years of a 30-year mortgage.

At least in its initial form, the new FHA program has no provision for homeowner-initiated requests for premium termination based on home value appreciation.

Homeowners with PMI whose loans are owned by giant investors Fannie Mae or Freddie Mac can apply for premium termination based on demonstrable increases in the market resale value of their properties. FHA borrowers won't have that option.

The new administration's move on mortgage insurance premiums sends a soothing message that it intends to maintain the FHA program as a competitive alternative for the buyers who need it. The move also signals that the new administration sees the FHA as a key vehicle for raising homeownership rates for African Americans, Hispanics and other minorities.

More so than the conventional market, FHA borrowers tend to be minorities, young, and often have credit histories and debt-to-income ratios that require hands-on, empathetic underwriting.

Prior to the Clinton administration's promise to extend automatic premium cancellation rights to FHA borrowers, some congressional critics had wondered aloud why the federal government effectively discriminated against FHA customers, given their demographics.

Rep. James V. Hansen, R-Utah, introduced a bill that would have forced HUD to give equal treatment to FHA home buyers compared with buyers using PMI.

Now that legislation won't be necessary.


Distributed by the Washington Post Writers Group.

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