Mr. Chairman and Members of the Committee, I am Ron McCord, CMB, President of American Mortgage and Investment Company, headquartered in Oklahoma City, Oklahoma. I am currently also serving as President of the Mortgage Bankers Association of America (MBA). With me, today, are Mike Ferrell, Senior Staff Vice President and Legislative Counsel, Karen Kapen, Associate Director and Counsel, and Shelia Green, Senior Director, Loan Administration.
MBA appreciates the opportunity to appear before the Committee today and to comment on the issue of private mortgage insurance and, specifically, on S 318, the "Homeowners Protection Act of 1997." We commend you, Mr. Chairman, for holding these hearings and for your continued leadership in this area. We are committed to continuing to work with you and the Committee to seek ways to keep the costs of home ownership at reasonable and affordable levels for the country's homebuyers.
Mr. Chairman, MBA supports the underlying objectives of your bill: to provide clear and concise information to homebuyers relative to their obligation to maintain or the ability to cancel private mortgage insurance (PMI). We do, however, believe it is important to this discussion to provide a fuller explanation of the nature and purpose PMI and to comment specifically on certain provisions of the legislation that may create unintended operational or administrative problems that could undermine your objectives; impose unnecessary costs and burdens on mortgage lenders and services, insurers and investors; and, thereby, diminish any benefits that could come to borrowers.
BACKGROUND
Mr. Chairman, private mortgage insurance is designed to spread the potential risk of financial loss that results from mortgage foreclosure over a large population. Specifically, PMI is written by a private company to protect mortgage lenders against financial loss occasioned by borrowers defaulting on mortgages. In most instances, PMI premiums are paid by borrowers in conjunction
MBA is the national association representing exclusively the real estate finance Industry. Headquartered in Washington, the association works to ensure the continued strength of the nation's residential and commercial real estate markets; to expand homeownersnip prospects through increased affordability; and to extend access to affordable housing to all American MBA promotes fair and ethical lending practices and fosters excellence and technical know-how among real estate finance professionals through a wide range of educational programs and technical publications. Its membership of approximately 2,700 companies includes all elements of real estate finance: mortgage companies, mortgage brokers, commercial banks, thrifts, life insurance companies and others in the mortgage lending field with their monthly mortgage payments. These premiums are based on a percentage of the loan amount, and the insurance only covers a specific percentage of the loss.
Today, 13 percent of all of those borrowers who have mortgages are insured by PMI. One out of seven new loans made each year carries PMI. Although these numbers appear small, they represent a significant additional number of Americans who are able to obtain mortgages due to the availability of PMI. Thus, PMI serves a valuable and practical purpose. It enables more consumers to obtain homes more quickly than they could without PMI.
Overall, PMI is necessary to help more Americans obtain the dream of home ownership. As has been demonstrated over the years, accumulation of the down payment is one of the single largest impediments to owning a home. The mortgage industry has recognized this problem and has created a vehicle, PMI, to enable borrowers to obtain mortgages in the absence of large downpayments. Typically, PMI is required when a down payment is less than 20 percent of the purchase price. If one believes in promoting the dream of home ownership for all Americans, then the existence of PMI, in addition to other forms of insurance, such as the Federal Housing Administration insurance programs (FHA), is a virtual necessity.
PARTICIPANTS IN THE MORTGAGE PROCESS
The Mortgage Lender
There are numerous players in the mortgage process. Mortgage bankers currently originate over 50 percent of all new loans. moreover, in most cases, they are not portfolio lenders and, thus, do not hold the loans that they originate. Instead, mortgage bankers rely on the secondary mortgage market as the primary source of long term investment in mortgages. Mortgage bankers make loans to borrowers and retain them only long enough to pool the loans together for sale to investors. Typically, the loans are packaged and sold as a group or "pool" of loans, or on an individual loan "flow basis." Most frequently, the resulting "pools" of loans serve as backing for mortgage-backed securities, which are sold to the ultimate investors. Accordingly, mortgage bankers are subject almost exclusively to the criteria imposed upon them by the secondary market participants, including making PMI a requirement on loans with downpayments of less than 20 percent. These participants include the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), as well as other private investors. Thus, for mortgage bankers, almost all of the decisions regarding the status of PMI and its cancellation rest with the investors.
Within this arrangement, the originating mortgage banker may not have selected which secondary market participant, or investor, will purchase the loan by the time the loan closing occurs. As a result, it is often difficult to ascertain at the consummation of the transaction which secondary market guidelines will apply. This uncertainty also applies to the specific requirements for cancellation of PMI!. Therefore, the Committee needs to move cautiously if it intends to mandate specific disclosure requirements at the time the transaction is consummated. !n most cases, this type of specific requirement cannot be accurately complied with due to the nature of the mortgage banking business. Disclosure with less specificity, however, may be accomplished without placing undue burden on the industry.
The Mortgage Servicer
The mortgage servicer is the party to which payments are sent, and with whom the borrower has the most frequent and direct contact. In some sense, services actually serve two masters: the investor and the borrower. Regarding the investor, the servicer has a fiduciary responsibility to the investor to protect the collateral. This responsibility is set forth in the contract between the parties. Therefore, the servicer is unable to cancel PMI! arbitrarily unless the borrower initiates cancellation and the investor grants the servicer the authority to do so. As a general rule, the ability to cancel PMI rests with the investors. In the case of Fannie Mae and Freddie Mac, PMI waivers are specified in their seller/servicer guidelines. In the case of some private investors, PMI! waivers appear in their servicing agreements. Although the servicer's relationship with an individual borrower is not formalized in a purely legal sense, the servicer, nonetheless, docs act in a manner that is similar to a trustee in that they are responsible for collecting monthly mortgage payments and remitting principal and interest to investors, as well as the proper amounts for hazard insurance, taxes, and PMI to the appropriate parties. Functionally, services act as the gatekeeper for PMI!. Services collect premiums for an indefinite period on behalf of the mortgage insurer and receive absolutely no fee income for administering this service. Services are paid the same fee by the investors, regardless of whether or not a loan is insured by PMI!. However, it must be noted that services do earn some benefit from all escrowed funds. This benefit manifests itself in compensating balances and the ability to obtain a lower interest rate on borrowed funds. These benefits, and others, translate into lower rates and fees for borrowers. Thus, the consumer does derive a financial benefit from these services.
It is also important to note that mortgage services are national companies. The largest servicer in the country, Norwest Mortgage, Inc., services loans from all 50 states and the U.S. Territories. In the course of its business, it deals with about 433 different investors and services approximately 1.5 million loans. Each investor has varying requirements for PMI cancellation. It is evident, therefore, that is it practically impossible to have specific disclosures identifying the PMI cancellation procedures either at the time of the transaction or later. There are simply too many sets of different rules and procedures for a servicer to track them with any specificity.
The Mortgage Servicer and PMI Cancellation
The mortgage contract typically provides an explicit duty for borrowers to maintain PMI for the life of a loan, and the courts have affirmed this duty. It is the exception to the rule that PMI can be canceled. Over many years, investors have become more flexible and have allowed borrowers to cancel PMI under certain circumstances, particularly, if the borrower has accumulated sufficient equity in the property. Some investors believe that once such an equity position has been achieved, the risk of default has been reduced.
Generally, each investor imposes specific guidelines for cancellation of private mortgage insurance. These guidelines/conditions vary by investor and may address a number of different factors including: l) the payment history of the borrower; 2) the age of the loan; 3) the market conditions of the area in which the property is located and whether the value of the property has diminished or increased; and 4) whether or not the owner resides in the property. The guidelines reflect different perceptions and evaluations of risk by investors. In order to cancel PMI, a borrower typically contacts the servicer with his/her request, and the servicer examines the current value to determine if the loan-to-value ratio (LTV) meets investor guidelines.2 In virtually all cases, an appraisal is required. The prudent lender must ensure the integrity of the asset, and an appraisal is the only way to do this. Unfortunately, this can be expensive for the borrower. However, there is no alternative to the fact that this obligation must be borne by the borrower. The vast majority of investors will allow cancellation only when the following general conditions are met: l) the LTV is 80 percent or less; 2) the borrower demonstrates an acceptable payment history; and 3) the loan has been on the books for a specified length of time.
Once again, however, it is important to note that services are merely the intermediaries in this process, and have no authority to modify the pre-conditions established by investors or insurers for mortgage insurance coverage. As such, the mortgage insurance companies (MIs) must be required to bear substantial responsibility and potential liability for administering this new regime.
THE LEGISLATION
S 318 amends the Truth in Lending Act to require automatic PMI cancellation and notice of cancellation rights with respect to those loans that require PMI. The bill requires originating lenders and services to disclose the following in writing:
At the time the transaction is consummated:
the current private mortgage insurance ratio (based on
original value at the time
the transaction was entered into);
identifying information to permit the borrower to
communicate with thelender/servicer; and the
procedures for cancellation.
With each written statement of account:
the above information; or
a written statement setting forth: l) a declaration
that the borrower "may" cancel PMI!; 2): a
description of the circumstances of cancellation;
and 3) an address and telephone number the borrower
may use to contact the lender or servicer for
further information.
Lenders/services are prohibited from assessing any fees on borrowers to cover the costs of providing the disclosures or information. The bill also grants the lender or servicer the ability to seek reimbursement from the private mortgage insurer for any costs incurred in the provision of any information.
At the outset, MBA believes that borrowers should be apprised of their rights regarding PMI. However, the legislation may pose some administrative problems for mortgage lenders and services.
First, as noted earlier, at the time the transaction is entered into, the majority of lenders do not know who the investor will be for that particular loan. As a result, the lender in most instances will be unable to communicate the exact procedures available to a borrower to effectuate cancellation of PMI. Due to this inherent lack of information, we recommend the adoption of a generic disclosure statement at the time of origination.
Second, the automatic cancellation requirement, which requires cancellation of PMI once the equity in the property exceeds the defined "private mortgage insurance ratio," is based on a specific loan to value ratio. Value is the based on the original value at the time of the consummation of the transaction. Services do not retain the data necessary to ascertain that the loan has reached a point where a borrower may have the ability to cancel his/her insurance. The original appraised value, the down payment amount, and the LTV information generally are not maintained by services in their automated systems. However, we believe these data are retained by the MIs who receive the monthly insurance premiums. Therefore, in order to cancel PMI automatically, services would have to rely on the accuracy and veracity of the information gathered by the MIs and submitted to the services. In order to protect services, a safe harbor limiting their liability from using the information supplied by the individual insurance companies should be included in any final version of the legislation.
Third, the bill requires: with each written statement of account, a statement that the consumer may cancel the private mortgage insurance and a description of the circumstances under which such a cancellation may be made." Inasmuch as there is no statutory right of cancellation, MBA believes the Committee should amend the "may cancel" language to read "may be able to cancel" because not all borrowers will have necessarily met the criteria to cancel their insurance. The "may" language implies that the borrower is actually able to cancel the insurance. This may not be the case. Further, a description of the cancellation procedures/criteria may be a practical impossibility. As stated earlier, each servicer serves hundreds of investors, each with their own set of cancellation requirements. Creating different computer databases for each investor requirement would not only be prohibitively expensive, but impossible to achieve. We recommend that this statement be deleted and a more generic statement inserted stating that there may be circumstances when PMI may be able to be canceled rather than the exact circumstances themselves. In addition, the requirement "with each written statement of account" poses a problem for our members who bill their borrowers monthly. It is doubtful that borrowers need to be apprised of their options regarding PMI on a monthly basis. The ability for borrowers to meet the criteria for cancellation does not change each month. Therefore, this requirement does not necessarily meet the purpose for which is was intended when monthly billing arrangements are present. Therefore, an annual disclosure would be a more feasible alternative, and MBA would urge adoption of this approach.
Fourth, the legislation enables lenders and services to seek reimbursement for their disclosure expenses from the private mortgage insurers. MBA appreciates this recognition. However, such reimbursement may be difficult to obtain both because quantification of such expenses may prove difficult and collection may be resisted by the MI firms. Moreover, reimbursement alone is insufficient. MBA believes there must be an explicit requirement for MI companies to release the relevant information, upon request either to the mortgage servicer or to the consumer directly. In order for your legislative goals to be accomplished, the data must flow freely between the MI companies and the services. Although we support such a reimbursement concept, MBA feels that this provision needs to be examined further. Finally, MBA believes: the proposed 90-day grace period should be applied both to existing mortgages and to those entered into after enactment. The current language would make implementation more difficult and cumbersome. To eliminate any confusion, a single effective date would be preferable.
CONCLUSION
In conclusion, MBA commends the Chairman for his diligent efforts to create uniform PMI disclosure and cancellation information. MBA supports the ability of borrowers to be apprised of their options regarding private mortgage insurance. However, the underlying objectives of S 318 may be undermined by the costs and associated administrative burdens that may be created for mortgage lenders and services as they attempt to comply with the new Act. Notwithstanding our concerns, we believe the bill can be amended in a way that provides consumers with the rights and information they need while at the same time not imposing additional and costly burdens on the mortgage services.
Mr. Chairman, on behalf of the MBA I want to thank you for the
opportunity to appear here today and to offer our perspective on
this issue and the legislation you have introduced. We are
committed to working with you and the Members of the Committee to
resolve the problems you have identified in a reasonable and
satisfactory manner. We would be pleased to answer any questions
you may have to provide further information, as necessary, for
the record.
Home | Menu | Links | Info | Chairman's Page