Senate Committee on Banking, Housing and Urban Affairs
Prepared Testimony of James V. Hansen
Representative from Utah
Hearing on S.318, "The Homeowners Protection Act of 1997"
February 25, 1997
INTRODUCTION
Mr. Chairman, and members of the Committee on Banking, Housing and Urban Affairs, it is a pleasure to be here today. I appreciate the opportunity to discuss Private Mortgage Insurance (PMI). I commend the Chairman for raising the important issue of what homeowners should know when they obtain a home mortgage, and more importantly, when they can stop paying for insurance they no longer need.
ROLE OF THE MORTGAGE INDUSTRY
Mr. Chairman, I applaud the changes that have occurred during the last few years regarding the origination of home loans. More people are becoming homeowners and more banks are providing mortgage credit The market is making homeownership a reality to many people, and I commend the mortgage industry for their innovative thinking in developing alternative mortgage instruments that target people who never thought they could afford a home. My office has worked closely with the industry for more than a year now, and l believe we are making progress. I applaud the Mortgage Insurance Companies of America (MICA) for identifying the need to get more people into homes, who otherwise would not have been able to afford one without MICA's insurance. Millions of people have become homeowners with the help of private mortgage insurance. Last year, PMI was unknown to many people. With your attention, Mr. Chairman, we will change that today.
My interest in the mortgage industry began when I left college many years ago. One of my first jobs was working with a mortgage company, and then later with an insurance company. During that time I learned that if an industry polices itself, the government should not interfere. I firmly believe that the government should stay out of the private market However, when an industry will not follow its own guidelines - I draw the line. For this reason I come before your committee to address a problem that is occurring for homeowners who overpay private mortgage insurance because they either are not told what it is; or what the requirements are to cancel it. Let me illustrate this point with two examples:
In the early 80's I bought a condominium in Northern Virginia. I did not want to invest a lot of money here because as we all know Congress can end up being a part time job. As I paid my monthly mortgage to my mortgage 5ervicer, I noticed I was paying around $20 a month for PM'. Being the fiscal conservative that In am, I wanted to stop paying it. When I called the mortgage servicer I was told that PMI protects the lender in case I default on my mortgage. Since I did not put down 20 percent on my home, I was required to pay it This made sense. I then asked my mortgage servicer what steps needed to be taken to cancel my PMI, andjust like thousands of other homeowners that's when the real adventure begins.
After a short conversation with my mortgage servicer l was told that l needed to pay $4,000 to arrive at the Loan to Value (LTV) ratio that the investor required. The LTV ratio was an assurance to the servicer that I was no longer a risky investment, and that if I had an LTV of 80%, I would no longer need PM'. That sounded reasonable, so I paid the lump sum. However, later that year I realized that I was still paying for PM'. Assuming this to be an error, I called my mortgage servicer and told them to fix it. This did not occur. I was told additional requirements needed to be met At no time did my mortgage service indicate everything I needed to do to cancel PM'. Each call to my servicer entailed new steps that needed to be taken to prove that I was not a risky borrower. One month I was told to get an appraisal. The next month I had to prove that I had a good payment history. The next month I needed to use their appraiser. Each month it was a new requirement.
EXTENT OF THE PROBLEM
After four years of negotiating with my mortgage servicing friends in Oklahoma, I decided to investigate how widespread the problem was. Now you may not think that $20 a month is a lot, but when its paid by millions of homeowners we start talking about real money. Now, as any good businessman can tell you, if you can get a little money from a lot of people, you really have something.
After an initial search, I discovered that the problem was more widespread than I had anticipated. There were lawsuits pending around the country. State legislators were drafting legislation to combat the problem. And mortgage companies were settling-out of court with promises to cancel thousands of PM' policies that were not no longer needed. Furthermore, when I raised the issue in town meetmgs, people began to tell me their horror stories, and many are worse than mine.
In each case there was one similar problem - homeowners did not completely understand what PM' was and under what circumstances it could be canceled. In my written statement I have included the actual language from a mortgage servicing company's guidelines to illustrate this point:
"You are required to maintain PMI over the life of your loan unless prohibited by applicable law. We will consider your wriften request to terminate PMI during the life of your loan if the additional risk resulting from termination of PMI is acceptable to us and to any investor who then owns your loan. The acceptability of such risk will be evaluated based upon a number of factors including, but not necessarily limited to, the age of your loan, your payment record, the length of time sinceyour most recent payment increase (if your loan provides for payment adjustments), whether or not you then reside in the property, the ratio of then unpaid principal balance of your loan to the lesser of the original purchase price or the original appraised value of the property, and whether or not the property may have diminished in value. In certain circumstances, we may require a current appraisal of the property. Under certain limited conditions we will give consideration to the amount of appreciation in the value of the property since the date of purchase, you must pay the cost of any appraisal and any permitted fee we then impose for evaluating your request. However. we are under no obligation to terminate PMI prior to the termination of your loan unless required by applicable law."[emphasis added]
After reading this I am sure you can see how any homeowner could be confused about private mortgage insurance. No industry guidelines oversee it. The conftision abounds. You can only play with words so long before they mean nothing and do even less.
MORTGAGE SERVICING DISCLOSURE EXAMPLES
GEORGIA EXAMPLE
To clearly illustrate this point, 1 submit the following account of a woman in Georgia and have included two letters she received from her mortgage servicer for the record. In her letter to me she states:
"In 1983 1 purchased a single home in Georgia for $50,718 on a variable rate mortgage arranged by the seller's Realtor. The mortgage was owned by a company who then sold the servicing arrangement to a bank on the east coast.
From the start ofmy loan and for the next 12 'A years 1 was charged and paid $238.44 a year for PMI. The cost of the insurance did not vary over that time although the principle owed decreed from $50,718 to less than $3,000 in January 1996.
In late 19951 began to enquire of my mortgage servicer about the necessity of the insurance after seeing by chance a short conversation about PM1 on the Internet. The company at first refined to cancel the insurance because they incorrectly identified my loan as an FHA loan. 1 continued to pursue the issue with my mortgage servicer, explaining that 1 had a conventional loan, and as soon as they admitted their error, the PMI insrance on my mortgage was terminated at my request and beme effective in 1996.
At the time of the termination, 1 asked for clarification about PMI from my mortgage servicer and they informed me that in the event that 1 had no delinquent payments in my history, "PMI could have been waived at a principal balance of $42,800," (letter JAMES V. HANSEN enclosed). The balance on my mortgage equaled the $42,800 value at the end of 1988, or 7 years before 1 had any idea that PMI could be cancelled."
For 7 years this woman unknowingly and in my opinion needlessly overpaid her mortgage servicer more than $4,000, and not once was she told that she did not have to keep paying it. There is some good news now, for example, at Navy Federal Credit Union, PMI is automatically cancelled at 80 percent LTV. This is both good for the consumer and 1 submit good business. 1 look forward to hearing from them later this morning about how we can stop the abuse of PMI.
CONCLUSION
The bottom line is that thousands of hard working American homeowners overpay PM1 each year because they don't know what it is or how to get rid of it. There is nothing more frustrating then paying for something that is not needed. Mr. Chairman, we must act. With PMI the people who can afford it least end up paying the most and we should stop it today.
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