Private Mortgage Insurance: Cancellation Options
Publication Date: December 1997
Publisher(s): Library of Congress. Congressional Research Service
If home mortgage borrowers are unable to make downpayments of at least 20%, lenders generally require that the borrowers obtain some type of mortgage insurance. In response, the borrowers either obtain private mortgage insurance (PMI) from mortgage insurers or, when eligible, insurance from a federal government agency. In recent years, the majority of borrowers who need mortgage insurance have obtained PMI.
The purpose of PMI is to protect the lender or secondary market investor from loss if the borrower defaults on a low-downpayment loan. As the borrower’s equity in the property increases, the risk of default decreases. The lender’s or investor’s risk of loss decreases as the borrower’s equity increases, and a point is reached where the mortgage insurance is no longer justified by risk.
Reportedly, however, there is widespread industry practice of requiring and collecting mortgage insurance premiums from borrowers when it is no longer necessary. In some cases, the insurance could be discontinued, but the burden is placed on the borrowers to request cancellation, and the borrowers are not aware of that option. No federal law requires disclosure of the option.
In the 105th Congress, legislation has been passed by the House and Senate to address the issue. As passed by the House, H.R. 607 would amend the Real Estate Settlement Procedures Act to require disclosure to the borrower of any rights to cancel mortgage insurance, and would provide mandatory disclosure once the loan had a 75% loan-to-value ratio. As passed by the Senate, H.R. 607 and S. 318 would require disclosure of the right to cancel mortgage insurance and provide for mandatory cancellation once a 78% loan-to-value ratio was achieved. The differences between the bills may be resolved during conference.