Good morning. My name is Bill Lacy. I am Chairman of Mortgage Guaranty Insurance Corporation. I am here representing the Mortgage Insurance Companies of America
Thank you for the opportunity to talk about private mortgage insurance and how it helps people buy a home. My industry fully supports your efforts to make it easier to understand the mortgage insurance cancellation process. By working together, I'm confident we can advance helpful legislation on this subject, which is confusing for some consumers.
First, I'll explain what private mortgage insurance is and how it works.
Mortgage insurance protects lenders from loss if a borrower does not make his mortgage payments. For good reason, lenders generally will not make a loan with less than a 20 percent down payment unless they have mortgage insurance protection. We insure the top 20 to 30 percent on loans with as little as a three-to-five percent down payment. There are eight companies in our industry and last year we insured mortgage loans totaling $127 billion.
Lenders obtain mortgage insurance under the terms of a master policy agreement with mortgage insurers they want to use. Lenders receive no rebate or commission from the sale of mortgage insurance, so they have no incentive to maintain coverage longer than it is needed. In fact, they are precluded by the Real Estate Settlement Protection Act from receiving any referral fees. This is a very important principle that we need to preserve.
While the lender or servicer of the loan communicates with the borrower, the mortgage insurer has no contact with the borrower. our relationship is with the lender or loan servicer. In spite of that, mortgage insurers share a common interest with the borrower. We want to be sure that the home the consumer buys is one he can afford now and for years to come. Why? Because if the borrower doesn't pay, we pay! Today the home ownership rate in America is almost 66 percent. My industry is proud to play a key role. in that accomplishment.
When we discuss cancellation of mortgage insurance, it's important to note that the decision lies solely with the lender or secondary mortgage market investor who is the beneficiary of our insurance. once we insure a loan, we cannot cancel it without instructions from the owner of the loan to do so. That is a critical feature of mortgage insurance and without it, the secondary mortgage market would suffer significant adverse effects.
Equally important, mortgage insurers cannot deny cancellation. Decisions to require mortgage insurance and to cancel it are solely at the discretion of the lender or the secondary market investor. That's the way it should be. otherwise, we might disrupt the flow of funds available for affordable low down payment mortgages.
For most first-time home buyers, the greatest barrier to home ownership is the down payment. With mortgage insurance, buyers can purchase a home with a very small down payment --enabling them to become homeowners many years sooner.
Personally, I bought my first home in 1972 with a 90 percent, MGIC-insured mortgage. Without private mortgage insurance, my family wouldn't have been able to purchase that home. Four years later, we bought a larger home with the appreciation from our first purchase. If we had had to spend two or three years saving a larger down payment for that first house purchase, we might have missed the opportunity to be homeowners because house prices were rising faster than my income. I personally am very thankful for mortgage insurance.
Since 1994, private mortgage insurance has saved home buyers $38 billion on down payments. over the past 40 years, private mortgage insurance has enabled 17 million American households to become homeowners as I did in 1972.
Senators, my business is risky. Losses come in large blocks during difficult, economic times and they are concentrated regionally even in good economic times. For example, when economic conditions deteriorated in the energy states in the mid-805, numerous foreclosures resulted. At that time, my industry paid more than $5 billion on foreclosed mortgages. During this crisis - and in recent regional downturns in Boston and Southern California -- my industry provided the first layer of protection for secondary market investors and federally insured lenders. Last year, my industry reported incurred losses of $1.2 billion.
Private mortgage insurance has been embraced by the marketplace as an efficient alternative to FEA insurance. Most importantly, it's a better deal for consumers. For example, while private mortgage insurance is cancelable, FHA insurance is not. A buyer of an $80,000 house with an FHA-insured loan will pay nearly $13,000 in insurance premiums over the term of a 30-year mortgage.
My industry supports full disclosure of cancellation rights to home buyers. Senator, we are committed to working with you to help consumers better understand the mortgage insurance process and their cancellation rights.
We have already demonstrated our commitment by our support of Congressman Hansen's proposal to notify borrowers annually of their right to cancel. We want a simple, common sense approach to enhancing borrowers' understanding of mortgage insurance.
My industry believes in the following:
First, at the time of loan origination we want the borrower to know that his loan includes mortgage insurance and how it may be canceled in the future. An explanation of how mortgage insurance works and how it can be canceled is critical to avoid confusion and misunderstandings.
Second, we support annual notification to borrowers that they can request cancellation of mortgage insurance. This information could be added to the lender'S annual year-end statement to the borrower. Done this way, cost would be minimized and mortgage servicers would enhance their relationship with borrowers.
Third, we support legislation that provides a framework for informing consumers of their opportunities to have their mortgage insurance canceled. At the same time, we need to avoid fixed or hard and fast rules. They do not work in a rapidly changing marketplace.
Lastly, as legislation is developed, we must not add unnecessary costs. We enjoy the most efficient mortgage market in the world. It is the envy of the world. Let's work together to keep it that way.
Mr. Chairman, my industry looks forward to working with you on this matter and others affecting homeownership in America. Thank you for inviting me here today.Other Consumer Protections Are Urgently Needed to Make the Mortgage Process Fairer for Consumers
The PMI problem is just the tip of the iceberg. Consumers face an array of hidden landmines as they try to protect their families' economic security when fmancing or refmancing their home. Unnecessary PMI expenses are one trap that can strap a family's budget. An unnecessarily high note rate, which can add thousands of dollars to a family's housing expenses each year, and other expenses incurred as part of the fmancing or refmancing package, can destroy a family's fmancial well-being.
Consumers face these problems because of loopholes in the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA). For example:
Under TILA, basic disclosures about the key terms of the mortgage loan are Generally not required until AFTER the consumer has already submitted a loan application and hundreds of dollars in fees. Except in limited circumstances, TILA only requires lenders to make a basic disclosure of key loan terms within three days after the consumer submits a loan application. Obviously, 'nLA should always require lenders to provide basic information about the loan terms they are offering BEFORE the consumer is forced to apply and incur the hefty expenses normally associated with applying.
Under TILA, the note rate and points charged by the lender are not a part of the TILA disclosure eventually received. Since consumers shop heavily on the basis of these terms, TILA should be amended to require lender to disclose these essential terms.
Under TILA, the terms disclosed shortly after the application is submitted can change at the closing.The lender needs to do is make a subsequent disclosure in the closing room. This virtually unlimited right of the lender goes far beyond prudent flexibility. It produces a one-sided transaction with the lender in the driver's seat.TILA should be amended to require lenders to stick with the terms they disclose up-front, at the time the consumer decides to submit an application. Unless lenders are forced to honor their disclosures, the disclosures are meaningless.
These are some of the more obvious loopholes in the laws under which consumers are forced to make one of the most important financial transactions of their lives. We look forward to working with you, Senator D'Amato, and all the distinguished member of this panel, to give American families the tools they desperately need to protect their fmancial health when financing and refmancing their homes.
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