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Mortgage insurance reform may come yet


LONG-AWAITED federal consumer protections for homeowners with private mortgage insurance almost squeaked through Congress in the closing hours before the Memorial Day recess.

But for the second time in six months, the House and the Senate headed home without completely resolving this sticky, contentious and expensive issue.

For the large number of homeowners who continue to pay premiums of $700 to $1,000 a year or more for mortgage insurance, here's an update on Capitol Hill's not-quite-ready-for-prime-time reforms:

Private mortgage insurance -- as distinct from Federal Housing Administration (FHA) loan insurance - is required by most lenders whenever a borrower obtains a mortgage with less than a 20 percent down payment.

Low down payment mortgages have higher default and foreclosure loss rates than do loans with larger down payments, and the Insurance coverage protects the lender against all or part of that risk.

Though private mortgage insurance (PMI) has enabled millions of cash-short borrowers to become homeowners, it has also had a fundamental flaw: Many borrowers have continued to pay PMI premiums for years beyond the point at which their equity stakes in their home exceeded the 20 percent standard.

Some homeowners with 30 percent and 40 percent equity in their property are still paying PMI premiums every month, even though they represent no economic risk of loss to the lender.

They continue to pay, in part, because neither their lender nor their mortgage insurer is under any current federal legal obligation to tell them that they can stop.

Only three states - New York, California and Minnesota require lenders to provide consumers a disclosure of their right to request and obtain termination of PMI coverage.

The pending federal reform legislation would correct most of this by forcing mortgage lenders nationwide to terminate PMI premiums automatically whenever a homeowner has paid down the loan to an equity "trigger" level -22 percent of the original home value for most borrowers, 23 percent for certain "high risk" borrowers.

The legislation would also allow borrowers with good payment histories who have reduced their principal debt to 80 percent of the original value of the house to ask for cancellation of PMI.

Mandatory notification

Finally, the bill would create a new, mandatory consumer information system for PMI. All lenders would have to explain to customers with PMI precisely what their rights to cancellation are, and how and when termination could occur.

The issues that blocked action on the reform package at the Memorial Day recess range from states' rights to the rights of borrowers deemed "high risk."

States with PMI cancellation statutes already on the books don't want the new federal statute to preclude them from enforcing their laws as is, or toughening them in the future.

Senate negotiators agreed to this, but the House wants the protection from federal preemption extended to other states - including Maryland, Massachusetts, Colorado and Mississippi - which have their own disclosure rules, but not termination requirements, already in effect.

The idea is that these states should be free to enact even tougher consumer protections than any federal standard Insurers and lenders are vigorously opposed, arguing that the more state rules they have to deal with, the higher their costs of doing business.

"Higher risk" borrowers represent probably the biggest hurdle confornting negotiations at the moment.

More difficult for some

Under the Senate's bill, home-buyers using certain low down payment programs sponsored by Fannie Mae and Freddie Mac would be subjected to a tougher standard for automatic termination of PMI.

Their loans would be eligible for termination only at their "half-life" -after 15 years of principal payments on a 30-year mortgage, for example.

Groups such as Consumers Union, the National Consumer Law Center and the American Association of Retired Persons think this unfairly discriminates against an entire class of borrowers, the majority of whom are likely to pay their mortgage bills on time.

Plus, they say, the determination of "risk" is put entirely in the hands of nongovernmental, private companies - Fannie Mae and Freddie Mac.

Rep. Bruce Vento, a Minnesota Democrat and a PMI reform advocate, says the bill still "needs specific criteria and guidelines" defining what constitutes high risk.

Otherwise, he believes, Fannie and Freddie would be free "to de-clare lots of things high risk," and require creditworthy, moderate-income, first-time homebuyers to pay PMI premiums for longer than most other borrowers.

The outlook for PMI reform? Stay tuned in June when Congress returns from recess.

It's a congressional election year, and the incumbents don't want to go home empty-handed again.

Calculating payment

You may calculate your monthly mortgage payment by calling Sundial. To access the mortgage rate calculation line by touch-tone phone, call 410-783-1800 and enter the number 3199.

Following the instructions, enter the dollar amount of the loan, the number of years of the loan and the interest rate of the loan. The service then will calculate your monthly mortgage payment.

There is no charge for the service.

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