Homeowners Protection Act

The Homeowners Protection Act is a law designed to reduce the unnecessary payment of private mortgage insurance (PMI) by homeowners who are no longer required to pay it. The Homeowners Protection Act mandates that lenders disclose certain information about PMI. The law also stipulates that PMI must be automatically terminated for homeowners who accumulate the required amount of equity in their homes.

The Homeowners Protection Act covers private residential mortgages purchased after July 29, 1999. It does not apply to Veterans Affairs (VA) or Federal Housing Administration (FHA) loans and posts a new set of requirements for "high risk" mortgages. This law also institutes new requirements for loans obtained before July 29, 1999.

PMI protects lenders from the risks of buyer default and foreclosure. It enables prospective buyers, who don't make a significant down payment, to obtain an affordable mortgage. It is used extensively to facilitate ‘‘high-ratio’’ loans for which the loan-to-value (LTV) ratio exceeds 80 percent. PMI enables a lender to recover the costs associated with the resale of foreclosed property...along interest payments and fixed costs, such as taxes and insurance policies, paid prior to the resale of the distressed property. Once a mortgage loan balance is below the 80 percent LTV ratio, PMI is no longer needed as it provides little extra protection for a lender and does not benefit the borrower.

Before the Homeowners Protection Act, many homeowners had problems canceling PMI. In some instances, lenders may have agreed to terminate coverage when the borrower’s equity reached 20 percent, but policies for canceling PMI coverage varied widely among lenders, and homeowners had limited recourse if lenders refused to cancel PMI. The act protects homeowners by prohibiting life-of-loan PMI coverage for borrower-paid PMI products and establishing uniform procedures for canceling PMI. The 80 percent LTV ratio (with corresponding 20 percent down payment) has been used by mortgage lenders for a long time as a prudent standard for mortgages. It ensures the borrower has enough financial interest in the property to continue making payments, and, in the event the borrower is unable to make the payments, that the lender has sufficient equity available to cover lender foreclosure costs.

However, as housing prices increased, 20 percent down payments became difficult for many prospective homeowners. Lenders began to look for ways to balance the increasing demand for home loans with the risks of providing loans outside the 80 percent LTV threshold. This led to the development of PMI, which helps mitigate lender’s risks on loans for which the down payment is less than 20 percent of the sales price or, for a refinancing, when the amount financed is greater than 80 percent of the appraised value.