Chairman D'Amato, Honorable Members of the Committee, distinguished guests, I am pleased to submit this testimony for the February 25, 1997 Senate Banking Committee Hearing concerning Private Mortgage Insurance (PMI) abuses on behalf of AHA, the American Homeowners Association.
Over the past four years we have been made aware of PMI abuses which occur at every stage of the mortgage process. This knowledge has come through the experiences reported by our members as well as through thousands of mortgage audits which were conducted for consumers and AHA members in all 50 states. Senator D'Amato is to be praised for taking the initiative and introducing S.318, The Homeowners Protection Act of 1997. Federal legislation requiring automatic cancellation and standardized disclosures at each stage of the mortgage process is urgently needed.
AHA was formed in 1994 to serve the needs and interests of homeowners across the nation, who are facing a squeeze on both their budgets and time. Today we proudly serve thousands of dues paying members in all 50 states with over 35 benefits and services, and are growing at a rate of over 1,000 members per week.
On behalf of our members, the millions of homeowners currently paying for PMI insurance, and millions of additional American consumers who would like to become homeowners, AHA has actively worked to bring the issue of PMI overcharges to fight for several years through our consumer information and the press. Today AHA released a special report homeowners can use to see if they can qualify to stop making these payments and save hundreds of dollars. This guide and worksheet can help thousands of homeowners qualify immediately to stop making these payments. This information has not been easily available to consumers.
PMI serves a useful purpose for home buyers who can't afford the standard 20% down payment on a home purchase. However, millions of homeowners are being required to continue these payments after they may be eligible to cancel them, resulting in overcharges amounting to hundreds of millions of dollars, which these homeowners can in afford. We strongly believe that loan servicers should be required to cancel PMI automatically when the loan balance is paid down below 75 or 80% of a home's resale value.
The experiences of AHA members underscore this problem. Private Mortgage Insurance (PMI) is a confusing and obscure concept for most homeowners and home buyers, who are usually overwhelmed in the swirl of a loan closing and are unclear that PMI is not flood, hazard, or mortgage life insurance. Many homeowners are unaware that they are even paying PMI.
Natalie Albert, an AHA member from New York, expressed the outrage shared by many homeowners across the nation about the process of obtaining PMI. "We had a history of paying early or on time. When we refinanced our home, after paying PMI on the original loan, our incomes were higher, and the borrowed amount was $10,000 less, but the monthly PMI charge was higher. We as the homeowner were to be paying for this insurance, but we were given no choice in selecting a carrier, and no reason for the higher charge. They would not even give me the name of the PMI carrier after I asked for it. It was all done in hazy secrecy. Even though we had no other debt, and an excellent payment record, when we went to refinance after three years they asked us to pay an up-front PMI fee again - again an up-front fee of 1-1/2 times the annual PMI premium. I screamed and yelled, and finally they made an 'exception'. If this is insurance, premiums should be based on risk. But there was no risk basis to what we were charged. It was just a made-up number. To me, that's like legalized theft."
Another problem experienced by our members is illustrated by the experience of Raj Verma, an AHA member from Pennsylvania, upon discovering that he was continuing to pay PMI payments after his loan was paid down below 80% of his original purchase price. "I've had my loan since 1985, paid $90,000 for my house, and the loan balance has been paid down to $62,000, which is less than 70%. My lender says the guidelines of the investor and the PMI company require me to continue paying PMI each month. But whose guidelines are they, and where can I find them? The lender has refused to tell me who the investor and PMI company are. From the recent sales in my neighborhood, I can easily show that my home is now worth $160,000. Where can I turn to stop making these payments?"
A further problem is illustrated by both Connecticut AHA member Glen Marr, and Florida resident Nancy Ryan. In 1995 Mr. Marr sought to have his PMI discontinued because his home value had increased substantially through a combination of remodeling and real estate appreciation. When he asked his lender to discontinue PMI, he was told he would have to obtain a full appraisal at a cost of some $350 or more. With the lack of clear-cut guidelines from his lender specifying conditions for releasing PMI, Mr. Marr hesitated to incur the expense of an appraisal, since he and his wife were unsure if they would be selling in the near future or refinancing the home. He continues paying PMI every month, receiving no benefit, like many thousands of similar homeowners across America. Why invest in an appraisal at $350-400 only to risk being refused or rebuffed by the lender? In Nancy Ryan's case, in the absence of clear-cut federal standards, it took four long frustrating years of persistence for her to persuade her lender that PMI should be dropped.
AHA believes that remedies for the problems of PMI overcharges need to be addressed at four levels, comprising the investors who control it, the PMI companies that issue it, the originator who requires it, and the servicer who implements and administers it:
- A standardized disclosure is needed at time of origination, which could take the form of a standardized booklet such as those already in existence for ARM loans, to be received by all borrowers required to pay PMI.
- Annual disclosure thereafter specifically informing those who are paying PMI that they are paying PMI and may have the right to cancel it. Along with this should be a standardized communication guideline for servicers and their customer service staff relative to alternatives and procedures for cancellation of PMI.
- Automatic cancellation when loan balance declines to below 80% of original value (or 75% in SMSA's designated by Federal Reserve Board for limited periods of time in the event of instability of property values).
- Simplified burden of proof and acceptability guidelines for servicers to verify and validate property value, including low-cost streamlined "PMI appraisal".
None of the above is intended to reduce the safety and soundness of PMI underwriting. Therefore, provisions for owner-occupied vs. non-owner occupied and good pay history versus bad pay history should be taken into account in final legislation.
Private Mortgage Insurance, or PMI is a blessing for many first-time home buyers who can't make the standard 20% down payment. By working together with both industry and government officials to put an end to consumer abuses related to PMI overcharges, AHA believes we can all create a big win for homeowners and home buyers without losing the legitimate value of PMI or creating an undue burden on the mortgage industry.