The Homeowners Protection Act of 1998
The Homeowners Protection Act went into effect in July 1999. It includes provisions that require lenders to inform borrowers about their right to request mortgage insurance cancellation and to automatically cancel insurance for borrowers who do not request it. Homeowners with existing mortgages must be provided with annual statements detailing whether and how they can cancel their insurance, but there is no requirement to automatically terminate the coverage under the Act.
According to nationally syndicated columnist Kenneth Harney, only about 250,000 American homeowners are carrying unnecessary mortgage insurance. When you look at census data, that works out to about 0.3% of home owners. Information from Mortgage Insurance Companies of America, the mortgage insurance industry trade group, indicates that there are approximately 5.2 million mortgage insurance policies in force, meaning only about 13% of the loans in any given portfolio will require annual notification.
At RMIC, our experience shows that most mortgage insurance cancels within the first three to six years when people move, sell their homes or refinance. This eliminates the possibility of automatic cancellation of mortgage insurance.
For loans that will be affected, the Act has six basic categories of disclosure and cancellation requirements:
- Voluntary cancellation upon written request from the borrower
- Automatic termination under certain circumstances without any request by the borrower
- Initial disclosure of the borrower’s rights at or before consummation
- Subsequent annual disclosures of those rights
- Notification upon cancellation of MI
- Notification if a request for cancellation is denied
Regulations require mortgage insurers like RMIC to only cancel mortgage insurance at the request of the lender, because the mortgage insurance is a contract entered into between the mortgage insurer and the lender, not the borrower. Upon the request of a lender, we are required to cancel the mortgage insurance within 30 days and the borrower must receive a refund of any unearned premium within 45 days.
RMIC, and other mortgage insurers will continue to provide the fastest possible response to requests to cancel mortgage insurance. At RMIC, we offer a variety of ways for lenders to make requests including:
The request can be made when 22% equity is reached or borrowers can request cancellation when their equity reaches 20% if the borrower has a good payment history, no subordinate liens exist and the mortgage holder is satisfied with the value of the property.
Servicers must disclose cancellation rights to borrowers with existing mortgages on an annual basis with a disclosure that provides the servicer’s address and telephone number. Borrowers may request cancellation when a loan amortizes to 80% LTV or is paid down to 80% LTV, if certain other requirements are met.
Servicers must cancel mortgage insurance at 78% LTV based on the initial amortization schedule or at the midpoint or half life of the loan based on the initial amortization schedule.
Servicers also must notify borrowers in writing within 30 days of cancellation that the MI has been terminated and premiums are no longer required. If the servicer determines the mortgage is not eligible for cancellation, they must notify the borrower in writing of the grounds for the decision.
Fannie Mae and Freddie Mac extended some provisions of the Act to all of the loans in their portfolios.
- Freddie Mac: Extends automatic cancellation to all insured loans in its portfolio.
- Fannie Mae: Extends automatic-termination to insured loans in its portfolio at the midpoint of the mortgage term, for example, at year 15 for a 30-year mortgage.
Both companies will continue their current cancellation-by-request policies for borrowers with good payment histories who can demonstrate by appraisal that their equity stake is 20 percent or higher. Both have also stated that they do not plan to set different standards for “high risk” loans such as low-down-payment, lower-credit-quality mortgages.
The Act strengthens these benefits of primary mortgage insurance, especially compared to lender paid mortgage insurance (LPMI) and “piggyback” (80/10/10) mortgages:
- Can be canceled once it’s no longer needed, unlike lender paid MI and some of the new agency programs with reduced coverage in exchange for delivery fees or higher interest rates.
- Is easier to use than an 80/10/10 because there is only one loan application, closing and monthly payment
While many lenders view LPMI as a simpler alternative to meeting the requirements of the Act, that is not necessarily true. LPMI requires significant additional paperwork and cannot be canceled. Expanded use of products like LPMI also endangers ancillary products and services provided by mortgage insurers.
LPMI requires certain disclosures even though it is not subject to the Act’s cancellation provisions. Lenders and Servicers must:
- Disclose cancellation rights to borrowers at closing as well as annually.
- Calculate the date on which the outstanding balance on a hypothetical mortgage loan, analogous to that being obtained in every respect except that it has borrower-paid MI rather than LPMI, will fall below 78% LTV.
- Provide borrowers with a generic analysis of costs and benefits of LPMI and borrower-paid MI covering the interest rate adjustment, advantages and disadvantages of both and the tax deductible issues at closing.
Once the initial mechanisms are in place, the Homeowners Protection Act will provide lenders with a simple solution to keep borrowers from paying unnecessary mortgage insurance premiums, without making coverage more expensive or harder to obtain. For more information about the Homeowners Protection Act of 1998, lenders should contact their local MBA or consult with their legal counsel for interpretation of specific provisions of the Act.
The Mortgage Bankers Association of America and America’s Community Bankers have developed a “best practices” guide to assist in compliance with the Act, titled “Implementation Guide to PMI Cancellation: Understanding the Homeowners Protection Act of 1998." The guide provides practical compliance suggestions and model disclosures as well as addressing some of the inconsistencies and gaps in the Act. The guide is available from your local MBA or ACB or by calling the MBA at 800-793-MBAA.