My name is Brian L. McDonnell, and I'm the President and Chief Executive Officer of Navy Federal Credit Union. I am here today to speak on behalf of the National Association of Federal Credit Unions (NAFCU), the Credit Union National Association (CUNA), and Navy Federal Credit Union to express my credit union's support and that of thousands of other credit unions represented by CUNA and NAFCU for the proposed "Homeowners Protection Act of 1997" (S. 318).
Mr. Chairman, Navy Federal, NAFCU, and CUNA applaud your efforts and those of Representative Hansen in introducing legislation which clearly informs existing and future homeowners that Private Mortgage Insurance (PMI) may not be required for the full term of the mortgage contract. Navy Federal has granted mortgage loans to our members since 1979. Our experience has shown that PMI cancellation requirements are confusing to many members1 despite our best efforts to disclose these requirements. We believe this legislation will increase the awareness of many of our members and millions of other homeowners who mistakenly have taken for granted that PMI premiums are required for the life of the mortgage loan. Our credit union, as is true with most businesses, knows that full disclosure and keeping members well-informed increases their satisfaction with the services we provide.
Navy Federal - like all other credit unions - is a member-owned, not-for-profit financial institution. Members are the heart of a credit union, the very reason for a credit union's existence. Credit unions are organizations of people. There is no group of stockholders for whom profits must be generated. Credit unions are democratically controlled by their members through volunteer officials and an unpaid board of directors elected by the membership. Credit unions stand in sharp contrast to profit-oriented intermediaries in the financial services industry.The motto of credit unions is not for profit, not for charity, but for service. This motto captures the essence of credit unionism. Although a positive bottom line is important for economic viability, credit unions focus on directly serving their individual member-owners. This characteristic distinguishes credit unions from other financial institutions.
Navy Federal Credit Union currently serves 1.6 million members worldwide through our 84 member service centers. Our-membership is mostly comprised of personnel from the Department of Navy, including the U.S. Navy and U.S. Marine Corps, and their dependents.
Since we initially began offering mortgage lending service to our members in 1979, Navy Federal has provided over 110,900 mortgage loans, totaling $12.6 billion, to help our members realize their goal of home ownership. Currently, we service over 63,000 mortgage loans, valued at $6.2 billion. We provide mortgage lending service on residential properties located in all 50 states and the District of Columbia.
Since the inception of Navy Federal's mortgage lending operation, we have been active in the secondary mortgage market. This means that Navy Federal sells and services mortgage loans for investors, such as Fannie Mae, Freddie Mac, Ginnie Mae, and private investors. Selling our mortgage loans to secondary market investors allows Navy Federal to avoid the interest rate risk that comes from holding long-term mortgage loans in portfolio and to recycle our capital into additional loans to our members.
Because of the requirements of the purchasers of Navy Federal's mortgage loans, we require PMI coverage when the member provides less than a 20% down payment. As you probably know, mortgage lending industry data clearly shows that the lower the down payment, as a percentage of the property value, the greater the risk of the loan to default. PMI allows lenders to better manage the risk of granting mortgage loans with low down payments, while permitting potential homebuyers who choose not to make a higher down payment to achieve the dream of home ownership. Therefore, PMI plays a pivotal and valuable role in the mortgage lending process. PMI fulfills a critical need, both for many first time home buyers, as well as for those members who have low-to moderate incomes and limited resources to apply toward a down payment for a mortgage loan. Without the availability of PMI, these low-to-moderate income members would be unable to obtain conventional mortgage loans to finance the purchase of a home. In addition, PMI allows certain members to purchase a home even though they elect not to use available funds to make a larger down payment.
Though we sell our loans to secondary market investors, we always retain the servicing. Our members continue to deal directly with their credit union for the life of the loan, even after their loans have been sold. This means we collect and distribute the principal and interest, escrows for real estate taxes, homeowner's and flood insurance, and PMI. The total PMI premiums collected from our members are passed directly to the PMI companies. We receive no administration fee from the PMI companies.
We are very concerned about saving our members money and protecting their interests, as well as protecting our investors. Therefore, it has been our policy to monitor the outstanding loan balances of our members' loans with PMI to ensure that they are not paying for PMI coverage when it is no longer required. This typically means that once the loan balance represents 80% or less of the original value of the property, Navy Federal automatically cancels the PMI on behalf of our members. We do not send a notice to our members requesting approval to cancel the insurance. We simply cancel it and notify our members by mail that the PMI is no longer necessary and has been canceled. This letter also advises our members of the reduction in their monthly payment resulting from the cancellation of PMI. We have been automatically canceling PMI for our members since we began offering mortgage loans in 1979. At present, Navy Federal cancels about 40 PMI premiums per month as a result of monitoring our members' outstanding principal balances.
You may wonder why we do this. The first and most important-- reason is that we are a credit union dedicated to serving the needs of our members. Navy Federal members are very loyal to their credit union. This is reflected in our low loan delinquency experience in our mortgage loans and consumer, credit card, equity, and federal education loan programs. We look for ways to repay the loyalty of our members by offering them low rates on loans, competitive rates on savings accounts, responsive and convenient service, and limiting the fees charged to members.
Another reason we can automatically cancel PMI for our members is that it's easy to determine when a mortgage loan reaches 80% loan-to-value or the required ratio established by the investor. Our automated system provides us with a monthly report of the loan-to-value ratio of each loan. If the loan-to-value ratio has reached the level at which PMI can be canceled, then we forward a letter to the member notifying them that the PMI has been canceled and that the monthly payment has been reduced.
Navy Federal does not verify that the property is currently occupied by the owner, nor are we concerned that property values are stable or decreasing. We believe that when the member obtained the mortgage loan with PMI from us, we struck a bargain with the member regarding the PMI requirement. The member understood that PMI was required because the down payment was less than 20%. When the accumulated equity in the property reaches 20%, we think the members expect their credit union to cancel the PMI. Most members have faithfully made payments on time, and some have made additional payments to reduce the outstanding loan balance. We believe they have fulfilled their end of the bargain, i.e., made payments to reduce the balance of their loans as required. By automatically ending the PMI, we are fulfilling our end of the bargain. Our investors have never expressed any reservation about Navy Federal automatically canceling the PMI requirement.
It is also quite common for members to contact us about discontinuing PMI prior to their loan balances reaching the ratio level necessary to cancel the insurance. We explain to these members that their current loan balance, compared to the original value of their home at the time of loan origination, does not presently allow us to cancel PMI. However, we carefully explain to members the actions which would allow cancellation of PMI. Members may obtain a new residential property appraisal, using a Navy Federal approved appraiser, if they feel the property value has appreciated due to market conditions, improvements made, or both. The appraisal cost averages $300 nationwide. If the appraisal establishes a higher value, decreasing the loan-to-value ratio to 80% or less, Navy Federal will cancel the PMI on behalf of the member.
In the event a loan has not paid down to the required ratio level, we inform the member about the investor's requirements for canceling PMI. For example, Fannie Mae -- the nation's largest secondary market entity - requires that a member's loan balance be reduced to 80% of the property value and that the member must have been current for the previous 12 months. Freddie Mac requires that members make mortgage payments on time for the previous 24 months. Private secondary market investors generally require the loan-to-value be reduced to 75%, not 80%, before PMI can be canceled.
In summary, :Mr. Chairman, Navy Federal, NAFCU, and CUNA support the proposed "Homeowner's Protection Act." We would recommend clarification of some of the technical definitions incorporated in the bill, but this is basically good legislation which will save homeowners money without jeopardizing the mortgage lender. We hope that the legislation can be kept simple for lenders to implement and, therefore, easy for credit union members to understand. The credit union movement stands ready t9 provide assistance to see that this legislation becomes law.
Mr. Chairman, this concludes my prepared statement. Again,
I wish to thank you on behalf of Navy Federal, NAFCU, and CUNA for
the opportunity to express our views on this proposed legislation. I
look forward to answering any questions that members of the
Committee may have.
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