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VOL. 113 | NO. 152 | Tuesday, August 10, 1999

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By LAURIE JOHNSON Its the law The new Homeowners Protection Act may save homeowners hundreds of dollars a year in unnecessary private mortgage insurance fees By LAURIE JOHNSON The Daily News A new law recently went into effect that protects homeowners from paying unnecessary insurance premiums on mortgage loans. The Homeowners Protection Act of 1998 became effective July 29 and requires that lenders cancel private mortgage insurance for a loan when it is no longer needed. "Homeowners deserve the right to cancel PMI when it is no longer needed, and automatic cancellation will save untold hours and costs in dealing with lenders over these issues," said Dr. Lee L. Verstanding, senior vice president for government affairs for the National Association of Realtors. "In fact, an estimated quarter million homeowners will save $250 to $1,200 a year in unnecessary PMI payments," he said. NAR members helped develop and fully supported the legislation on behalf of homeowners nationwide, Verstanding said. Private mortgage insurance is popular with home buyers because it is one of the easiest and least expensive ways to buy a home with a low down payment, said Ellen Schweppe, spokesperson for the Mortgage Insurance Cos. of America, the industrys main trade association. "Normally, bankers require 20 percent down," she said. "But, if you put less than 20 percent down and get an insured loan, you can get into a home faster or you can buy a larger home if your salary will support it, so its a good financial tool for consumers." The purpose of mortgage insurance is to protect lenders and mortgage underwriters against the risk of default on low downpayment mortgages. "Its insurance on behalf of the lender, but it also helps the borrower, too, because without it, the lender wouldnt be able to extend the loan," Schweppe said. Borrowers pay mortgage insurance premiums each month as part of their home loan payment. Mortgage insurance costs vary, depending on the policy and the price of the home. According to Schweppe, the typical cost of mortgage insurance for a $100,000 loan ranges from $25 to $65 per month, depending on how much the borrower puts down and how much coverage the investor of the loan wants. "From the borrowers perspective, once they are able to cancel their mortgage insurance, they have more money each month," Schweppe said. Many consumers dont realize that the mortgage insurance company plays no role in the decision to cancel, Schweppe said. Its up to the lender or investor who owns the loan, such as Freddie Mac or Fannie Mae. Many homeowners continue to pay premiums for this insurance long after reaching the industry standard threshold of 20 percent equity in their homes, Verstanding said. "Although most lenders have technically allowed borrowers to cancel PMI, many consumers have been unaware of their right to do so, or havent remembered to take the necessary steps," he said. "Of those who have, many found the efforts to cancel their premiums were cumbersome and confusing." The new law protects homeowners from paying unnecessary PMI premiums by providing for automatic cancellation of the insurance once a threshold of 22 percent equity is reached, based on the original purchase price. Homeowners also will be able to request cancellation when their accumulation of equity reaches 20 percent. The new law will not pre-empt any laws in eight states relating to cancellation of PMI that took effect prior to January 2, 1998. Those states include California, Connecticut, Hawaii, Maryland, Minnesota, Missouri, New York and Texas. However, if the protections offered by state laws are not as strong as the federal standards within two years, the federal standards will prevail, Verstanding said. While the automatic cancellation provisions under the new law don't cover existing mortgages, mortgage lenders will be required to notify all homeowners both new and existing of their rights to cancel PMI, as well as information about who to contact for further information about cancellations. For example, consumers who hold mortgages that have been sold to Freddie Mac or Fannie Mae still would need to contact their lender once their home equity reaches 20 percent or more of the original purchase price. Both Fannie Mae and Freddie Mac released guidelines earlier this year to their lenders that expand cancellation rights under the federal law to homeowners with existing mortgages. "These new guidelines are, we think, a little more consumer-friendly," said Freddie Mac spokesperson Brad German. Another important aspect of the new law is if a homeowner hasnt reached 20 percent equity but believes the value the house has substantially increased, his or her lender may cancel PMI if a new appraisal shows the loan-to-value ratio to be 75 percent or lower, Verstanding said. "The important thing is to talk to them before paying for an appraisal," he said. The new federal law, however, does not apply to the government mortgage insurance program run by the Federal Housing Administration. For most borrowers, FHA insurance is not cancelable and must be paid for the life of the loan. The new law also does not cover piggyback loans, which include a second mortgage to cover part of the down payment instead of mortgage insurance. Payments on the second loan cannot be canceled and must be paid in full. According to local lenders, private mortgage insurance companies are now providing them with information, such as brochures and pamphlets, to give to borrowers to help them comply with the new law. "Were doing everything we can," said Richard Camparato, president of First Tennessee Mortgage. "Obviously, were doing what the law requires, but we also plan to take an extra step or two to make sure were doing the right thing for the consumer." In the past, First Tennessee has provided consumers with some direction about how to discontinue private mortgage insurance, such as numbers to call and information about the appraisal process, Camparato said. Under the new law, First Tennessee will give disclosure at the time of application, as well as disclosure at the closing. "In essence, were now advising them of the new policy, which offers them two programs: borrower initiated cancellation or automatic termination. "Under the borrower initiated termination, we would advise them of the time at which they can request the cancellation of PMI, on or after a certain date, and this is a date based solely on a schedule that the principal balance of the loan would amortize down to 80 percent. "With automatic termination, this will take place when the principal balance on the loan, based again on this schedule, reaches 78 percent of the property value. At that time, we take care of the insurance and get rid of it for them."
RECORD TOTALS DAY WEEK YEAR
PROPERTY SALES 57 280 1,209
MORTGAGES 55 244 916
FORECLOSURE NOTICES 8 52 151
BUILDING PERMITS 0 541 2,593
BANKRUPTCIES 37 157 618
BUSINESS LICENSES 12 77 276
UTILITY CONNECTIONS 0 0 0
MARRIAGE LICENSES 0 0 0