When Congress passed legislation two years ago giving millions of homeowners the right to have their monthly mortgage insurance premium payments canceled, it was hailed as a major new advance for consumers.
But one large group of homebuyers - young, urban, and often minority - was left out of that reform: people with Federal Housing Administration mortgages. Now an effort has begun on Capitol Hill to remedy that omission, and to give FHA mortgage borrowers across the country the same rights as those in the private mortgage market.
The congressman who wrote the original private mortgage insurance cancellation bill, Rep. James V. Hansen, a Utah Republican, introduced a bill about two weeks ago requiring FHA insurance payments to be terminated under the same rules as for private mortgage insurance (PMI). With close to 1 million households taking out low down-payment FHA loans per year, plus 6.7 million households with existing FHA mortgages, the sweep of Hansen's new bill (H.R. 5338) is potentially vast.
In introducing the measure, Hansen said its purpose is simple: to "prevent the federal government from collecting mortgage insurance from FHA loan holders who have enough equity in their homes ... to pose [no] risk of loss." The required minimum amount of equity for cancellation under the bill would be 20 percent.
Hansen said that after passage of the PMI-cancellation law two years ago, "many FHA borrowers began to ask why the law did not apply to their loans." After studying the matter, Hansen found that, on the one hand, FHA "is making billions in profits," but that it experiences minimal losses on mortgage defaults from homeowners with 20 percent or higher equity stakes. Less than 1 percent of consumers who reach the 20 percent level subsequently default, according to Hansen, and "in most cases no loss is incurred by the FHA."
Under the new proposal, FHA homeowners would be eligible for automatic cancellation of their mortgage insurance premiums when their loan has been amortized down to 80 percent of the original property value. Under certain circumstances, they could also apply for cancellation when the value of their home has increased through inflation or improvements to a point where their equity is 20 percent. Like homeowners in the conventional market, they would have to contact the actual owner of their mortgage for guidance on how to apply for cancellation.
Whatever its sponsorship, mortgage insurance exists to protect lenders and investors from the heightened risks of default and loss they face when they make low down-payment loans. In the case of PMI, coverage generally is required whenever borrowers' down payments are lower than 20 percent. The private insurance coverage protects the lender up to some contractual level - say the first 25 percent of any losses following default.
FHA insurance is different. It is required on all FHA loans, no matter what the down payment, and covers 100 percent of all losses. As a practical matter, if an insurance claim is filed, FHA typically pays it off and takes over the property for later resale.
The FHA program is different in other ways as well. In many cases, FHA funds very low down-payment mortgages for borrowers who could not qualify for a home loan in the private market. This means buyers with lower incomes and rockier credit profiles than would be acceptable to private insurers. FHA borrowers tend to be first-time homebuyers (80 percent of all loans last year), and often are from minority groups (42 percent last year).
FHA officials had not seen a copy of Hansen's bill when contacted last week, and had no detailed comment.
But Matt Franklin, deputy chief of staff of the Department of Housing and Urban Development (HUD), parent agency of the FHA, said that while the agency would not reject the bill out of hand, "it would constitute a significant change" for the FHA's 100 percent insurance concept. That, in turn, could decrease investors' confidence in the safety of FHA mortgage securities.
The top congressional lobbyist for the Mortgage Bankers Association of America, whose members originate the bulk of FHA loans nationwide, was outspokenly critical of the bill. Howard Glazer, senior vice president of the trade group and a former top HUD official, said that cancellation of insurance would inevitably lead to higher costs to the consumer for an FHA loan, either through higher insurance premiums or higher interest rates.
Asked for comment on Glazer's critique, a staff aide to Hansen said "we heard the same arguments against PMI cancellation - that we were going to raise the cost of insurance premiums and scare away investors, but none of that happened."
Should FHA homeowners look for insurance cancellability in the near future? Not this year, anyway, with Congress on the verge of adjournment. But look for a concerted effort to push this through in the next Congress, no matter which party wins in November.
Kenneth R. Harney is a syndicated columnist. Send letters in care of the Washington Post Writers Group, 1150 15th St. N.W., Washington, D.C. 20071.