I have introduced S 318, the Homeowners Protection Act of 1997, which seeks to protect our nation's homeowners, particularly low-income and first-time home buyers, from having to pay for unnecessary and costly private mortgage insurance. Thousands of hard working Americans who strive every day to afford a house of their own are unfairly paying for private mortgage insurance which is not required and is no longer necessary. We must not have current and future homeowners paying up to hundreds of millions of dollars a year for insurance that serves no useful purpose. This is a practice which must be stopped. Right now, it is unethical. After this bill becomes law, it will be illegal. This legislation is intended to stop this injustice, while still providing lenders with fair protection against default.
In 1995, almost 6 million Americans bought homes. Approximately 2 million of those homeowners also purchased private mortgage insurance. Today, over 40 percent of new homeowners purchase private mortgage insurance. Thousands of American homeowners -- perhaps as many as 20% of homeowners who have private mortgage insurance-- are overinsuring their homes simply because they are not informed of whether they have the right to cancel private mortgage insurance.
Many homeowners are being forced to make payments for private mortgage insurance even after they have accumulated substantial equity in their homes; they continue to pay for private mortgage insurance long after the loan- to- value ratio is sufficient to protect lenders against default. Private mortgage insurance rates average between $20 and $100 per month, depending on the home purchase price, the amount of down payment and other factors. These consumers are unknowingly paying from $240 a year to $1200 a year for absolutely no reason - no potential benefit can accrue to the homeowner who is unnecessarily paying for this insurance. When the legitimate need for private mortgage insurance ends, the payments should stop immediately.
My bill would ensure that this unfair practice is discontinued by giving future homeowners the right to cancel private mortgage insurance when it is no longer needed to protect the homeowner -- in most cases, when they accumulate equity equal to 20% of their original loan value. With respect to existing mortgages, the Homeowners Protection Act would mandate disclosure of cancellation rights to the homeowner on an annual basis. This important legislation potentially could save current and future homeowners millions of dollars.
Now let me make one thing clear -- private mortgage insurance does serve a purpose. Typically, lenders require home buyers to purchase private mortgage insurance if the borrower makes a down payment of less than 20% of the purchase price. The purpose of the insurance is to provide lenders, and subsequent purchasers of the mortgage, with protection in the event of default on the mortgage. It is in the best interest of all Americans that lenders have fair protection against default, so as to ensure their continued safety and soundness. Together, we can encourage the pursuit of the American dream of homeownership without allowing the fleecing of homeowners in the process.
I strongly encourage passage of this legislation which will help to make sure that money for unnecessary insurance premiums stays where it belongs -- in homeowners' pockets.