Homeowners Protection Act

Introduction

The Homeowners Protection Act (HPA), also known as the Private Mortgage Insurance (PMI) Cancellation Act, was enacted in 1998 by the United States Congress to address the persistent problem that many homeowners faced with unwanted and often unnecessary PMI costs. The main purpose of the HPA is to provide homeowners with the right to cancel PMI under certain circumstances, thereby potentially saving them thousands of dollars over the life of their mortgage.

What is Private Mortgage Insurance (PMI)?

Private Mortgage Insurance is a type of insurance that lenders require from homebuyers who finance more than 80% of their home’s value. In other words, if a homebuyer puts down less than a 20% down payment, they typically must pay for PMI. PMI protects the lender in case the borrower defaults on the loan.

Even though PMI protects the lender and not the borrower, the cost is borne by the borrower. This can add hundreds of dollars to the monthly mortgage payment. While PMI can make it possible for borrowers to purchase a home with a smaller down payment, it can also become a significant financial burden.

Key Provisions of the Homeowners Protection Act

Automatic PMI Cancellation

One of the most significant aspects of the HPA is the mandate that lenders must automatically cancel PMI when the borrower’s mortgage balance reaches 78% of the original value of the home (loan-to-value ratio of 78%) and the borrower is current on their mortgage payments. This provision removes the onerous task from the borrower of having to request cancellation, as it is done automatically by the lender.

Borrower-Initiated PMI Cancellation

The HPA also allows borrowers to request PMI cancellation once their loan balance reaches 80% of the original value of the home, meaning they have built up at least 20% equity. To initiate this cancellation, the homeowner must send a request to their lender and the following conditions must generally be met:

• The homeowner must have a good payment history (no late payments).
• The property must not have any junior liens (like a second mortgage).
• The homeowner must provide evidence (such as a professional appraisal) that the home value has not declined below its original value.

Final Termination

If PMI has not been canceled by automatic cancellation or borrower-initiated cancellation, the HPA also provides for final termination of PMI at the halfway point of the mortgage term. For example, on a 30-year mortgage, PMI must be terminated after 15 years, irrespective of the loan balance or property value. This ensures that homeowners are not stuck paying for PMI for the entirety of the loan term.

Covered Loans

The Homeowners Protection Act applies to residential mortgage loans on a single-family home or a multi-family dwelling with fewer than five units, and includes both primary and secondary homes. However, it is important to note that the HPA does not cover loans covered by government mortgage insurance such as FHA loans or VA loans.

Exclusions

Some mortgage loans, particularly those considered high-risk, may not be subject to the same PMI cancellation rules. High-risk loans may include loans on properties with reduced marketability, loans to borrowers with poor credit histories, and loans with non-standard terms.

Disclosure Requirements

The HPA imposes several disclosure requirements on lenders to ensure that borrowers are fully informed about PMI and their rights to cancel it. These disclosures include:

• At loan closing, lenders must provide a written notice explaining PMI and stating the borrower’s right to obtain cancellation.
• Annual written statements must be provided to the borrower that include information on the borrower’s rights to PMI cancellation and termination.

Impact on the Mortgage Industry

The enactment of the Homeowners Protection Act has had a significant impact on both borrowers and lenders:

• For borrowers: The ability to cancel PMI provides a substantial financial relief. Homeowners with sufficient equity in their homes can cease paying PMI premiums and thus reduce their monthly mortgage costs.
• For lenders: Compliance with the HPA has necessitated changes in lending practices and documentation. Lenders must not only follow the automatic termination rules but also respond promptly to borrower-initiated cancellation requests.

PMI Cancellation Process

The process of canceling PMI involves several steps:

1. Review Loan Documents: Homeowners should review their mortgage documents for specific terms regarding PMI cancellation.
2. Monitor Equity Growth: Keep track of the mortgage balance and the home’s value to determine when the 20% equity mark is reached.
3. Request Cancellation: When the mortgage balance falls to 80% of the home’s original value, homeowners can submit a written request to their lender asking for PMI cancellation.
4. Provide Proof of Value: Lenders may require a professional appraisal to confirm that the current home value meets necessary criteria.
5. Stay Current on Payments: Ensure all mortgage payments are up to date, as delinquencies can delay the cancellation process.

Common Questions and Concerns

How long does PMI last?

PMI typically lasts until the mortgage balance is paid down to 78% of the home’s original value. However, borrowers can request cancellation once the balance is at 80%, provided they meet other requirements.

Can PMI be reinstated?

Under certain circumstances, lenders can reinstate PMI if the homeowner fails to maintain required mortgage conditions, such as allowing a second mortgage that affects the equity position or becoming delinquent on payments.

Does PMI affect credit scores?

PMI payments do not directly affect credit scores, but maintaining PMI indicates a higher loan-to-value ratio which can indirectly influence credit worthiness assessments by lenders.

Are there any tax benefits to PMI?

As of the writing, homeowners may be able to deduct PMI premiums as mortgage interest on their federal tax returns, depending on their income and filing status. It’s advisable to consult with a tax professional for specifics related to PMI deductibility.

Resources for Homeowners

Homeowners seeking further information or assistance about PMI and the Homeowners Protection Act can access a range of resources, including:

• Consumer Financial Protection Bureau (CFPB): CFPB PMI Information
• Federal Trade Commission (FTC): FTC Home Loans
• Housing and Urban Development (HUD): HUD Homeownership Programs

Conclusion

The Homeowners Protection Act was implemented to rectify the long-standing issue of unnecessary PMI costs burdening homeowners. By establishing clear guidelines for the cancellation and termination of PMI, the HPA empowers homeowners to save significantly over the life of their loans. The Act’s provisions for transparency and mandatory lender compliance ensure greater fairness and financial stability for millions of American homeowners.

As with any significant financial decision, understanding one’s rights under the HPA and the specifics of their mortgage agreement is crucial. Homeowners should actively engage with their lenders and take proactive steps to ensure they are not overpaying for PMI longer than necessary.