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WASHINGTON. The integrity of legislative reforms to provide homeowners with automatic cancellation rights for private mortgage insurance had been threatened by new loopholes approved by the Senate Banking Committee late last month, according to Consumers Union.
Michelle Meier, counsel for governmental affairs at Consumers Union, says that the new watered-down version of the bill could give lenders excuses to keep forcing consumers to pay PMI insurance when it's no longer necessary. Even after the equity in their homes has reached 22 percent, lenders could deny PMI cancellation if the loan was classified as "high risk." This measure could be considered by the full Senate later this month, before Congress adjourns for the year.
"Creating a loophole for so-called 'high risk' loans violates the spirit of this legislation. The whole point here is to define the level where a homeowner has built up enough equity in their home to eliminate the need for this extra housing expense. This loophole will continue to force homeowners to pay unnecessary insurance premiums," said Meier. "It is unconscionable to put American homeowners on an unnecessary PMI treadmill that adds hundreds of dollars to a family's housing costs each year."
Consumers Union joined with Consumer Federation of America and U.S. PIRG in writing members of the committee asking them to modify the bill so that it "will produce true reform." In that letter, the consumer groups highlighted areas where they want the bill strengthened.
In 1996, about half of all new mortgages were saddled with mandatory private mortgage insurance because the down-payment was less than 20 percent. MGIC, a major private mortgage insurance company, has testified before Congress that at least 250,000 homeowners are now overpaying PMI.
Over time, this PMI adds thousands of dollars to the cost of home ownership. According to the Congressional Research Service, on a $100,000 mortgage where there is a five percent down-payment, the PMI on a 30 year fixed mortgage would amount to $65.00 a month. For a ten percent down-payment, the PMI would be $43.00 a month.
Although it has made home ownership much more accessible to many first time buyers, problems have arisen when homeowners are forced to continue paying PMI where their equity build up makes it no longer necessary.
The Senate legislation, authored by Sen. Al D'Amato, is intended to terminate the homeowner's obligation to pay PMI premiums once 22 percent equity in the home has been built up. The Senate Banking Committee approved the measure by voice vote.
A similar bill passed the House of Representatives by an overwhelming vote of 421-7 on April 16. It called for automatic cancellation rights for PMI when the owner's equity reaches 25 percent.
