get rid of PMI? New law
and policy changes make it easier
borrowers who need private mortgage insurance to obtain their loans
will get a money-saving break thanks to a federal law that takes
effect July 29.
And now, through some policy changes issued
this month, Fannie
Mae and Freddie
Mac will pick up where legislators left off, ordering lenders
to apply some of the law's principles to existing mortgages.
The changes should make more consumers aware
of when they can eliminate PMI and make it easier to do so. That
could save borrowers hundreds -- or even thousands -- of dollars
over the lives of their loans.
"Many people will be helped," says Bob Engelstad,
senior vice president of credit policy at Fannie Mae.
"We think it is going to be a couple hundred
thousand or more whose insurance will be canceled" under one provision,
he adds. Plus, "The disclosure for both new loans and existing loans
will prompt a lot of borrowers to look into it and make some informed
decisions about whether they're in a position to cancel."
PMI is for
PMI can make mortgages possible for many potential home buyers who
don't have a lot of cash. It covers lenders in case a borrower who
puts less than 20 percent down defaults, making mortgage companies
willing to roll the dice on such mortgages. In fact, two out of
five home buyers obtain PMI-supported loans, according to the Mortgage
Insurance Companies of America, a trade association. The coverage
is supposed to expire when the borrower surpasses 20 percent equity.
Yet, out of ignorance or lender malfeasance,
many people have ended up paying PMI premiums long after they cross
the 20 percent threshold. For years, that led to angry phone calls
and heated debates, but no concrete reform. Then the industry outraged
the wrong person -- a member of the U.S. House of Representatives
-- at the wrong time. Rep. James Hansen, R-Utah, who couldn't get
a straight answer about how to eliminate PMI on his condominium
near Washington, introduced the Homeowners Protection Act of 1998 that
President Clinton eventually signed into law last summer.
Under the act, a borrower who gets a mortgage on or after July 29
can request that PMI be canceled once the loan is reduced to 80
percent of the home's value. At 78 percent loan-to-value, or LTV,
the lender must cancel the coverage automatically. On a $100,000
home with $10,000 down, PMI might cost about $40 a month. So someone
who had the insurance eliminated would spend $480 a year less than
someone who forgot the coverage was there.
changes for new homeowners also will take effect.
Since last year, however, existing homeowners
have remained in limbo while industry officials figured out how
to treat outstanding loans. Those deliberations have now culminated
in several changes that Fannie Mae and Freddie Mac -- along with
lenders who sell loans to them -- will implement during the next
few months. They aren't as consumer-friendly as the ones that apply
to new borrowers, but they should still make life easier to people
who already have mortgages.
on existing loans
For instance, existing homeowners won't have their PMI canceled
automatically once they reach the 78 percent LTV mark. Officials
say that's because lender computer systems wouldn't have been able
to track a person's paydown progress against the original home value
in some cases. Instead, people will have the insurance terminated
for them at the midpoint of their loan term.
"On a 30-year loan, once it gets to 15 years,
PMI would be automatically canceled," Engelstad says.
By comparison, a new homeowner getting a $112,500
mortgage on a $125,000 home would pass 78 percent LTV, or $97,500,
in nine years and eight months. That assumes the interest rate was
7.11 percent -- the national average 30-year fixed mortgage rate
found by a May 24 Bankrate.com survey -- and that no extra
principal payments were made.
the delay? Y2K
There's another downside to this policy too. Since Fannie Mae and
Freddie Mac didn't want mortgage companies to face the PMI modifications
and Year 2000 changes at the same time, they're not forcing lenders
to comply right away.
"Because of Y2K considerations and what have
you, the time it takes to set up systems, etcetera, we're not making
it mandatory until January 2, 2001," says Albert LeQuang, manager
of mortgage credit policy for Freddie Mac.
The news isn't all bad, however. Lenders have
the option to implement the change immediately, and LeQuang says
some have indicated they will do so. Plus, the agencies are making
it easier for borrowers to cancel PMI on their own.
For example, Freddie Mac used to require a loan
be on the books for at least two years before it could qualify for
insurance cancellation. That's no longer the case, thanks to a policy
change in early May.
"When the LTV ratio reaches 80 percent or less,
based on the original value of the property, there no longer is
a mandatory waiting period," LeQuang says. "If you run into substantial
income or you hit the lotto or whatever and you bring in some money
and reduce the amount due, then you don't have to wait the two years."
Some adjustable-rate borrowers used to have
to wait at least a year after their last payment adjustment in order
to qualify for an insurance removal, but Freddie Mac eliminated
that requirement as well.
Another minor change makes it easier for borrowers
who have just barely missed a couple of payments to qualify for
PMI cancellation. In the past, somebody couldn't have had more than
one late charge in the past year. Those charges kick in between
16 and 29 days after a payment is due. Now, it doesn't matter how
many times borrowers are that late, as long as they haven't been
30 days late in the past 12 months or 60 days late in the past 24
Because of the complex nature of some of these
changes and the different compliance deadlines that apply to them,
experts say borrowers should go ahead and request PMI cancellation
if they think they might be eligible. That holds especially true
for people who have made extra mortgage payments to lower their
principal balance and people who find out home values are appreciating
in their area. Either a rise in home values or a fall in principal
balance adds to equity and draws the 20 percent PMI finish line
Borrowers should realize, however, that these
new rules only apply to loans sold to Fannie Mae and Freddie Mac,
not those which lenders hold "in portfolio." Some existing homeowners
may not benefit from the changes as a result, even though most mortgages
do get sold off these days.
lender for details
To find out which category your loan falls in, contact your original
lender or the service company to whom you send the payments. Even
if the mortgage hasn't been sold, though, it can't hurt to ask if
the lender will voluntarily apply the new provisions anyway.
Finally, those who feared a provision in the
original law that exempted so-called "high-risk" borrowers from
the 78 percent cancellation benefit no longer need to worry. The
secondary agencies that were left with the task of defining the
term decided not to cut anyone out of the loop.
"They'll get the treatment provided for in the
act without any exception," Engelstad says. "The automatic cancellation
only requires the loan be current at the time."