7

We bought a house in 2005, and since we did not put 20% down, we have been paying PMI. Since then, the value of our home (and neighborhood) has declined. Our principal balance is currently 77% of the value of the original loan amount, but the estimated value of our house is less than the principal balance.

We have never refinanced or anything - this is still the exact same mortgage we signed when we purchased the house.

I looked at the Homeowners Protection Act on the FDIC.gov site, and from what I can tell, if your principal balance falls below 78% of the original loan amount, the lender must terminate PMI.

Here is the section from the HPA that leads me to believe that:

Section V, Automatic Termination

The Act requires a servicer to automatically terminate PMI for residential mortgage transactions on the date that:

• the principal balance of the mortgage is first scheduled to reach 78 percent of the original value of the secured property (based solely on the initial amortization schedule in the case of a fixed rate loan or on the amortization schedule then in effect in the case of an adjustable rate loan, irrespective of the outstanding balance), if the borrower is current;

or

• if the borrower is not current on that date, on the first day of the first month following the date that the borrower becomes current (12 USC §4902(b)).

If PMI is terminated, the servicer may not require further payments or premiums of PMI more than 30 days after the termination date or the date following the termination date on which the borrower becomes current on the payments, whichever is sooner (12 USC §4902(e)(2)).

There is no provision in the automatic termination section of the Act, as there is with the borrower-requested PMI cancellation section, that protects the lender against declines in property value or subordinate liens. The automatic termination provisions make no reference to good payment history (as prescribed in the borrower-requested provisions), but state only that the borrower must be current on mortgage payments (12 USC §4902(b)).

The last paragraph says that there is no provision that protects the lender against declines in property value.

I wrote a letter to my mortgage company requesting a removal of my PMI, and I included a link to the Homeowners Protection Act. They stated that I need to authorize an appraisal in order for them to proceed. I know that an appraisal is a waste of money since the value of our house is less than our mortgage amount.

I called in to inquire about why an appraisal was needed, and they said they would not cancel PMI until our principal balance was less than 80% of the appraised value of our house. They said that if I feel that my PMI should be cancelled for other reasons, I need to send in written letter disputing their policy.

Before I proceed further, I am wondering if I am barking up the wrong tree... Am I interpreting the Homeowners Protection Act incorrectly? Does it matter that my principal balance is less than 78% of my original mortgage amount? Does PMI cancellation always need to look at the value of the house?

Edit: I should probably add that we have never been late on payments - we have always paid on time, so we are current.

I just want to verify this before I make a fool of myself.

Thanks in advance!

Brian

Example Numbers

Here are some example numbers to illustrate where we are with our mortgage in case I did not explain it well:

  • Original Mortgage Amount: $100,000
  • Current Principal Balance: $77,000
  • Current Estimated Value of the Home: $70,000
6

First, you are reading that document correctly, but it's not 78% of original mortgage. It is actually 78% of original home value.

For example, if the home was valued at $100K when you bought it and you received a $90K loan, PMI must be removed when you owe $78K, not 78% of $90K.

To make matters worse for the bank, they missed the required timing to drop PMI. I would print the document you referenced, cite the applicable portion, and tell them if they do not comply, you will report them for failure to comply. For example,

I'm sure I am not the only one in this situation, and the FDIC will be eager to assess the huge fines they can collect from a bank that isn't operating within the law.

Something like that.

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    +1 I think the bank employee is using the standard response when the home owner requests that PMI be dropped before the 78% point is reached or when the 78% point is reached early because of extra payments on the mortgage (the law says that PMI must stop when the 78% point is reached on the amortization schedule and the payments are current, not when the 78% point is actually reached; for early dropping, the bank is allowed to charge a appraisal fee). – Dilip Sarwate Mar 8 '13 at 10:46
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    Ahh - that's probably it. I have made a lot of extra payments, I have reached 78% earlier than scheduled. I didn't realize that is what that means. So I will need to look at my original amortization schedule and find out when it is supposed to be at 78%? – BrianH Mar 8 '13 at 13:43
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    @BrianH - right, 78% LTV based on initial V and natural amortization. This I why I advise, especially for those at 85% LTV who think they can find the cash soon after closing to do it first. You can be 80% a week later but the amortization has it occurring in year 5. If you have initial loan,value and rate, it's easy to tell when you'll get to 80% on the table. – JoeTaxpayer Mar 8 '13 at 15:00
  • @JoeTaxpayer Thanks very much for explaining this. It's a bummer for me since it will be a few years before we get to 80% on the original schedule, and I sure won't count on the value of our home skyrocketing anytime soon. It sounds like I am stuck with PMI for a while longer. – BrianH Mar 8 '13 at 16:40
  • @JoeTaxpayer What is economic rational to follow original amortization schedule when cancelling at 78%? It seems like law was poorly worded. – user1700890 Apr 13 '18 at 17:07

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