PMI: A set of three lousy letters that experts say cost American homeowners dearly through mortgage lender malfeasance and consumer ignorance.

But thanks to legislation signed last week, people with small down payments who sign mortgages next summer stand to save hundreds, even thousands, in private mortgage insurance premiums.

"PMI is a good tool for some folks because it allows people who couldn't otherwise get into a home to get into a home," says Kimo Kaloi, a legislative assistant for the bill's sponsor, Rep. James Hansen. "But the problem was, the banks and insurers were abusing this and people were spending millions of dollars a year."

It's a requirement
Homeowners don't really want it this way, but it's a simple fact of buying: Mortgage lenders demand insurance to protect their investment, and they won't sign people up without it. Homeowner's policies are a standard requirement, as is flood coverage in certain high-risk areas.

Yet, for borrowers, PMI is a much more obscure product -- borrowers pay for it, but can't make claims on it. In fact, the only parties that stand to benefit are the lenders, who use the coverage to make sure they don't get creamed if the borrower defaults, and the mortgage insurers, who collect borrowers' monthly premiums.

Typically, customers need to get PMI if they can't come up with a 20 percent down payment to buy a house -- no small feat for some people, considering that's $20,000 for a $100,000 property. Then, they need to maintain the policy until they cross that one-fifth-of-principal threshold, a process which can take years on longer-term mortgages.

The bill keeps on coming
Many borrowers found, however, that when they had paid enough off, they were still sending in PMI premiums, experts say. Or, in plain English, they were buying an utterly unnecessary product.

That caught plenty of people's attention, but nobody seemed to do anything about it on a national level, Kaloi says. Then Hansen ran into trouble with his own lender, who kept giving conflicting information about what the Utah Republican needed to do to cancel PMI for the condo he bought near Washington. The result was a bill to remedy the situation, which was introduced in Congress in February, 1997, and finally reached President Clinton's desk for signing July 29.

So, what's new?
So, what's changed? Mortgage professionals say it's a whole lot for new homeowners.

"The bottom line is, now their mortgage insurance will be canceled automatically and that's a big effect," says Sharon McHale, a spokeswoman for Freddie Mac. "A number of borrowers carry mortgage insurance when they don't need to."

The law's provisions, which take effect on new loans initiated a year from last month's signing date, set several federal disclosure and termination rules.

First, new borrowers will be told at closing how many years and months it will take for them to pay off enough of the loan to cancel PMI. Second, mortgage servicers each year will give all borrowers a telephone number they can call for information about canceling.

As for the termination portion of the legislation, it allows most people who reach the 80 percent threshold to request that their policies be canceled. And lastly, new borrowers who reach 22 percent equity will have their PMI canceled automatically by the lender.

The financial impact
To see the financial impact, consider how the new rules would apply to a $100,000 home with a $10,000 down payment and a resulting $90,000 mortgage.

On a 30-year fixed mortgage at 6.84 percent (the national average according to Bank Rate Monitor's most recent survey) monthly payments for principal and interest would be $589. PMI premiums, meanwhile, would be $39 a month, says Geoffrey Cooper, a spokesman for Mortgage Guaranty Insurance Corp. in Milwaukee.

Under those conditions, a borrower would have to make PMI payments until the loan balance dropped below $78,000 -- something that wouldn't happen until nine years and five months later. While that would cost $4,407 in insurance premiums, the same person would pay $9,633 more, or $14,040 total, if the PMI ran for the entire 30-year term.

If any problems come up, Fannie Mae recommends borrowers contact the Better Business Bureau or their federal representative. In the case of a bank lender, a customer can go to the appropriate regulatory agency, which may be the Treasury's Office of Thrift Supervision or Federal Deposit Insurance Corporation.

Is it enough?
Despite all of its promise, the new legislation still contains some language that could be problematic, according to Jean Ann Fox, director of consumer protection for the Washington-based Consumer Federation of America.

California, Texas, Missouri, Minnesota, Maryland, New York, Connecticut and Massachusetts have laws on the books now that control collection of PMI. They have two years to bring those laws into line with the federal legislation, Fox says.

They also can pass laws tougher than the federal law. However, the new rules prevent states without PMI statutes from writing laws of their own.

The law allows lenders to continue requiring PMI all the way down to 50 percent equity for so-called "high-risk" borrowers, without defining what the term means.

That in turn could lead to a troubling paradox, Fox says. If "high-risk" borrowers were defined as those who couldn't afford to put 20 percent down -- the same ones who now constitute a sizable portion of people needing PMI -- then who would actually enjoy the bill's rewards?

"Our concern is if you determine 'high risk' consumers too broadly, a lot of the people who need the benefit of this would not get it," Fox says. "We just thought that the bill could have been much better."

What is high risk?
As it stands, the task of defining "high-risk" falls to Freddie Mac and Fannie Mae, the two large government-sponsored corporations that buy mortgages from lenders, package them, and resell them to investors. Neither has developed a policy yet, according to representatives, but certain loans traditionally have been flagged as riskier than others, says Bob Engelstad, Fannie Mae's senior vice president for credit policy.

They include cash-out refinance loans, in which borrowers refinance their first mortgages to larger ones in order to free up the cash difference for other purposes, and reduced documentation loans, in which customers provide less proof of income and other information during the approval process. Loans for people with spotty credit histories and higher debt-to-income ratios also fall into that category, Engelstad says.

"Going forward, we'll have to put those guidelines into some kind of published standard," he adds. "We expect to have that done by early next year."