Q I recently noticed that I am being charged $8.07 a month for private mortgage insurance (PMI). The closing for my house was in September 1974. I informed the current mortgage company administering my loan that I agreed to this insurance for a period of 9 years after the time of closing under the purchase agreement. I was informed by the investor, however, that my lender has a policy that PMI must be carried during the life of the loan. Does this arbitrary imposition of PMI by an investor sound proper to you? If not, what do you suggest I do to have the PMI charge stopped? A This is a very serious problem on a nationwide basis. Indeed, the California Association of Realtors has estimated that home owners in that state alone pay $27.2 million a year in mortgage insurance premiums for coverage that no longer is required.
When you purchase property, lenders would like to have at least 20 percent equity in that property. The theory behind this equity requirement is that, if there is a foreclosure, the property should sell for at least 80 percent of the market value then. While nobody can agree that properties will sell at foreclosure sales for this amount, the insurance companies presumably have run statistical tables indicating that 20 percent is a comfortable figure for business purposes.
Lenders require mortgage insurance on all home loans where the buyer's down payment is 10 percent or less of the value of the home. On loans where the down payment is more than 10 percent but less than 20 percent of the value of the property, lenders generally require this private mortgage insurance if they intend to sell the note in the secondary mortgage market to such organizations as the Federal National Mortgage Association or Federal Home Loan Mortgage Corp.
Unfortunately, most homeowners do not really understand that they are paying for this mortgage insurance as part of their monthly house payment. Usually, homeowners are unaware of these additional amounts, because the PMI usually is taken out by the lender to protect the lender -- not the borrower -- against losses. However, as is always the case in a real estate transactions, the homeowner pays the ticket.
The usual rules relating to PMI state that, when the loan-to-value ratio (i.e., the amount of the then-current mortgage compared with the original sales price) becomes less than 80 percent, the PMI policy can be canceled. It is interesting to note that this loan-to-value ratio applies not to the current value of the home, but usually to the original sales price. This in itself creates considerable difficulties, because, as we all know, the mortgage loan balance declines very, very slowly on a 30-year loan over the first 10 years.
There are two separate issues involving the PMI policy.
First, it recently has been called to the attention of the federal authorities that many lenders actually have canceled the PMI but have not told the homeowners and, thus, those homeowners have been required to continue to pay the premiums for insurance coverage that no longer exists. In fact, the Federal Home Loan Bank Board has taken action against lenders who have canceled these policies but continue to charge the homeowners for the insurance premiums. Indeed, Fannie Mae recently advised mortgage lenders in a memorandum that they must stop collecting these mortgage insurance premiums upon cancellation of the policies.
The second question relates to the issue of when the policy can be canceled. Generally, this is a decision made by the lender.
It is recommended that every homeowner write his or her current lender asking for information about the PMI policy. The homeowner should ask at least the following questions: * Am I paying a PMI premium?
* If so, how much is the monthly and yearly premium?
* Is my PMI policy still in effect? If not, when was it canceled?
* If the policy is still in effect, what is the policy regarding termination of that insurance coverage?
Insist on receiving a written response.
It has been estimated that individual homeowners may be paying as much as $150 a year on a $60,000 mortage for unnecessary coverage. It is suggested that if enough pressure is placed on lenders, and if enough consumers write their individual lenders asking these questions, that significant reform can take place in the real estate marketplace.