Order Code 97-373 E
Updated February 15, 2001
CRS Report for Congress
Received through the CRS Web
Private Mortgage Insurance:
Bruce E. Foote
Analyst in Housing
Domestic Social Policy Division
If home mortgage borrowers are unable to make downpayments of at least 20% of
the home’s purchase price, lenders generally require that the borrowers obtain some type
of mortgage insurance. In response, the borrowers either obtain private mortgage
insurance (PMI) from mortgage insurers or, when eligible, insurance from a federal
government agency. In recent years, the majority of borrowers who need mortgage
insurance have obtained PMI.
The purpose of PMI is to protect the lender or secondary market investor from loss
if the borrower defaults on a low-downpayment loan. As the borrower’s equity in the
property increases, the risk of default decreases. The lender’s or investor’s risk of loss
decreases as the borrower’s equity increases, and a point is reached where the mortgage
insurance is no longer justified by risk.
Reportedly, there was widespread industry practice of requiring and collecting
mortgage insurance premiums from borrowers when it is no longer necessary. In some
cases, the insurance could be discontinued, but the burden was placed on the borrowers
to request cancellation, and the borrowers were not aware of that option. No federal law
required disclosure of the option.
The Homeowners Protection Act of 1998, P.L. 105-216, was enacted to address
the issue. The law requires disclosure of the right to cancel mortgage insurance. The Act
requires lenders to terminate PMI upon written request by borrowers whose loan
balances have reached 80% of the original property value, and it provides for mandatory
cancellation once the loan balance reaches 78% of the original value of the property
securing the loan. The provisions cf the Act covering PMI become effective on July 29,
1999, and in general, apply to loans originated on or after July 29, 1999.
Technical corrections to the Act were enacted in Title IV of P.L. 106-569, which
is cited as the Private Mortgage Insurance Technical Corrections and Clarification Act.
Congressional Research Service ˜ The Library of Congress
Generally, lenders require that borrowers make downpayments of at least 20% of the
home price in order to obtain mortgage loans. If a borrower is unable or unwilling to
make downpayments of at least 20% of the home price, then some type of mortgage
insurance or guarantee is required. This insurance may take one of several forms: (1) the
borrower may obtain mortgage insurance (which is generally referred to as private
mortgage insurance or PMI) from an insurance company, (2) the borrower may obtain
insurance from the Federal Housing Administration (FHA), (3) if eligible, the borrower
may obtain a Department of Veterans Affairs (VA) home loan guarantee, or (4) if eligible,
the borrower may obtain a direct or guaranteed loan from the Department of Agriculture.
In either case, the insurance enables the borrower to obtain a loan that would not
otherwise be available, or to obtain a loan on terms that would not otherwise be
permissible. PMI and FHA are often the only options for most borrowers who need
The FHA home loan insurance program was begun in the 1930s, when lenders had
largely withdrawn from the mortgage market. The program was designed to encourage
lenders to begin making long-term mortgage loans again. FHA agreed to pay for the
lenders’ losses if the borrowers defaulted on the loans. (See RS20530, FHA Loan
Insurance Program, an Overview.)
In the 1950s, private insurers saw the value of providing a similar service to the
higher end of the mortgage market (FHA-insured loans are generally limited to 95% of an
area’s median home price). By the 1970s, private insurers were originating a larger
volume of loans than FHA. That changed in the late 1980s when the private insurers
tightened their underwriting standards because of the large losses the industry was
experiencing. From 1986 until 1990, FHA wrote a larger volume of loans than the private
insurers. Since 1991, the private insurers have again been producing the largest volume
of insured loans, except 1994 when FHA insured more loans.
Canceling Mortgage Insurance
If lenders do not require mortgage insurance on a loan on which a borrower makes
a downpayment of at least 20%, it would seem reasonable to permit the cancellation of
mortgage insurance for the borrower who accumulates equity of at least 20% in the
mortgaged property. In fact, 6 states — California, Connecticut, Hawaii, Maryland,
Minnesota, and New York — require that lenders disclose to borrowers when the
borrowers have accumulated equity of 20% of the original value of the home, and that
lenders disclose that PMI may be canceled once that prescribed equity threshold is
Most mortgage loans are sold in the secondary market. The Federal National
Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation
(Freddie Mac), the two giants of the secondary market, permit the cancellation of PMI.
Under Fannie Mae guidelines, at the time of loan origination and annually, borrowers
must be informed that their PMI may be canceled if certain conditions are met. The
mortgage insurance may be canceled when a borrower with a good payment history
accumulates equity in the home that is equal to 20% of the home’s original value, whether
the equity was accumulated through prepayment of part of the loan or amortization of the
loan. When a loan reaches its “half-life” (15 years on a 30-year mortgage and 7.5 years
on a 15-year mortgage) and the loan is current, the mortgage insurance will be
Freddie Mac also has guidelines regarding the requirements to be met on loans that
Freddie Mac purchases. The guidelines require a lender to cancel PMI in response to a
request from the borrower if certain conditions are met. The lender has one of three
options to choose in determining the loan-to-value (LTV) ratio. Under option 1, the LTV
ratio must be 80% or less of the current appraised value and (1) 2 years must have elapsed
since the loan was originated, and (2) the increase in value must be attributable to
improvements made to the property since the loan was originated. Under option 2, the
LTV must be 80% or less of the original value and (1) 2 years must have elapsed since the
loan was originated, (2) the 80% LTV was reached as a result of payments on the
principal, and (3) the lender certifies that the current value is at least equal to the original
value. Under option 3, the LTV ratio must be 75% or less of the current appraised value,
and 2 or more years but less than 5 years must have elapsed since the loan was originated.1
The borrower may not have been 16 to 29 days delinquent more than once in the 12month period preceding the request for PMI cancellation. If the mortgage is an adjustable
rate mortgage or a graduated payment mortgage, at least 12 months must have elapsed
since the last increase in monthly payments.
The purpose of PMI is to protect the lender or secondary market investor from loss
if the borrower defaults on a low-downpayment loan. If circumstances prevent the
borrower from continuing to meet the mortgage loan obligations and the borrower has
little equity in the mortgaged property, the borrower is likely to default on the loan. The
transaction costs of selling the property may exceed the borrower’s equity. As the
borrower’s equity in the property increases, the risk of default decreases. If circumstances
prevent the borrower from continuing to meet the mortgage loan obligations and the
borrower’s equity in the mortgaged property exceeds the transaction costs of selling, the
borrower is more likely to exercise the option of selling the property rather than default
on the loan. The lender’s or investor’s risk of loss decreases as the borrower’s equity
increases and a point is reached where the mortgage insurance is no longer justified by risk
to the lender.
Reportedly, there was widespread industry practice of requiring and collecting
mortgage insurance premiums from borrowers when it is no longer necessary. Since the
protections that PMI offers flow to parties that are not paying the insurance, market
discipline does not necessarily address the problem. In some cases the insurance could be
discontinued, but the burden was placed on the borrowers to request cancellation, and the
borrowers were not aware of that option. Until 1998, no federal law required disclosure
of the option. Fannie Mae and Freddie Mac have guidelines permitting PMI cancellation,
but in the past neither agency had required disclosure of the option.
These LTV ratios apply to owner-occupants or second home owners. For investors the LTV
ratios are 65% for option 1 or 2, and 60% for option 3.
It was alleged that borrowers could be paying $240 to $1,200 annually for mortgage
insurance that was no longer needed. Dozens of class action law suits were filed against
lenders for failure to make that disclosure. Legislation was enacted in the 105th Congress
to address the issue.
The Homeowners Protection Act of 1998
The Homeowners Insurance Protection Act (H.R. 607) was introduced on February
5, 1997, and was passed by the House on April 16, 1997. The Homeowners Protection
Act of 1997 (S. 318) was introduced on February 12, 1997, and was passed by the Senate
on November 9, 1997. As amended by both houses, S. 318 was cleared for the White
House on July 16, 1998, and signed into law on July 29, 1998, as the Homeowners
Protection Act of 1998 (P.L. 105-216). The provisions of the Act covering PMI became
effective on July 29, 1999, and, in general, the provisions apply to mortgages originated
on or after July 29, 1999.
Technical corrections to the Act were enacted in Title IV of P.L. 106-569, which is
cited as the Private Mortgage Insurance Technical Corrections and Clarification Act.
Cancellation at Borrower Request. The Act requires lenders to terminate PMI
upon written request by borrowers whose loan balances have reached 80% of the original
property value. As amended by P.L. 106-569, four conditions have to be met: (1)
borrowers must submit written requests that cancellation be initiated, (2) borrowers must
have good payment histories as defined in the Act, (3) borrowers must be current on the
payments required by the terms of the mortgage, and (4) borrowers have to satisfy any
lender requirement for evidence that the value of the property has not declined below the
original value and for certification that the equity in the property is not encumbered by
subordinate liens. Borrowers have a choice of determining whether the 80% of value is
based on the initial amortization schedule or on actual payments made by the borrowers.
Amendments in P.L. 106-579 provide that for adjustable rate mortgages the determination
is based on the amortization schedule then in effect. Senate report language for S. 318
indicated that the law is not intended to create a 20% minimum equity requirement for
PMI cancellation but that it creates a floor and lenders may not impose more restrictive
Automatic Termination. The Act provides for automatic termination of the PMI
requirement once the loan balance reaches 78% of the original property value.
Amendments in P.L. 106-579 provide that if the borrower’s payments are not current on
the termination date, then PMI will be automatically cancelled on the first day of the first
month after the date on which the borrower becomes current on the payments. The
amendments also provide that, for adjustable rate mortgages, the determination is based
on the amortization schedule then in effect. Additionally, the Act provides that PMI will
no longer be required once the loans reached their half-life, if the borrowers are current
on their payments.
Exceptions for High Risk Loans. Exceptions are provided for loans defined as
high risk under guidelines published by Fannie Mae and Freddie Mac, or under similar
guidelines determined by lenders. Under such loans, lenders will not be required to cancel
the PMI requirement upon the request of the borrowers, but the PMI requirement would
terminate on the date that the loan balance is scheduled be at 77% of the original property
value. The cancellation date is based solely on the original amortization schedule, and the
PMI requirement must be canceled regardless of the actual loan balance on that date. For
these high risk mortgages, the PMI requirement will also terminate at the half-life of the
loans if the payments are current.
Exceptions for Loans with Lender-Paid Mortgage Insurance. The Act
also provides an exception from PMI cancellation on loan transactions on which the PMI
is paid by someone other than the borrowers. On certain transactions, for example, the
borrowers may pay higher than market interest rates, and obtain loans under which the
borrowers do not pay any discount points or PMI. In effect, these costs are built into the
interest rates and capitalized over the life of the loans. To subject such loans to PMI
cancellation would be to penalize the lenders who make the loans and pay the costs on
behalf of the borrowers. Thus, lenders would be discouraged from offering a loan product
that has been useful to borrowers with limited up-front funds. The Act provides that such
loans will not be subject to borrower-initiated or automatic PMI cancellation.
The Act requires that lenders provide such borrowers with written notice: (1) that the
borrowers have no statutory right to request PMI cancellation, while borrowers under
other loan programs have such rights in addition to automatic PMI termination at some
point; (2) that the loans usually result in higher interest rates than would otherwise be
required, and that PMI is terminated only when the loans are paid off or refinanced, (3)
that there are advantages and disadvantages to the loan program, and (4) that the lenderpaid mortgage insurance may be tax deductible.
Disclosure Requirements. The Act requires several disclosures for newly
originated loans. Except for high risk loans and adjustable rate mortgages, lenders are
required to provide the borrowers with written amortization schedules. Additionally,
borrowers are to be provided with written notice: (1) that the borrowers may cancel the
PMI obligation once the loan balances have reached 80% of the original property value,
and indicating the date on which such cancellation may be requested based upon the
amortization schedule; (2) that the borrowers may cancel the PMI at an earlier date once
loan balances have reached 80% of the original property value, based upon actual
payments; (3) that the PMI requirement will automatically terminate when loan balances
have reached 78% of the original property value, and indicating the cancellation date; and
(4) that there are exemptions to these cancellation requirements, and indicating whether
such exemptions apply in these cases.
For high risk loans, lenders are required to provide written notice that PMI may not
be required beyond the half life of the loans, if the loans are current. On adjustable rate
mortgages, lenders must provide the borrowers with notice that the borrowers may cancel
the PMI obligation once loan balances have reached 80% of the original property value,
and that the lender will notify the borrowers when the cancellation date is reached.
On all newly originated loans that require PMI, lenders are required to provide
borrowers with annual written statements disclosing the rights of the borrowers to cancel
the PMI. Borrowers must be given the address and telephone number the borrowers may
use to determine that information.
On mortgages originated prior to July 29, 1999 and which required PMI, lenders are
required to provide annual written statements which disclose that PMI may be canceled
under certain circumstances with the consent of the lender and in accordance with
applicable state law. Borrowers must be given the address and telephone number the
borrowers may use to contact the lenders.
Law Not Applicable to FHA, VA or Rural Housing Loans. Section 2(11)
of the Act defines “private mortgage insurance” as mortgage insurance other than that
made available under the National Housing Act, Title 38 of the United States Code, or
Title V of the Housing Act of 1949. The home loan insurance programs of FHA are
authorized under the National Housing Act, the guaranteed home loan program of VA is
authorized under title 38 of the United States Code, and the rural housing programs of the
Rural Housing Service (RHS) of the Agriculture Department are authorized under Title
V of the Housing Act of 1949. Thus, the provisions of the Act do not apply to FHA, VA,
or USDA housing loans.
Borrowers under the VA and RHS programs do not pay any monthly or annual
mortgage insurance, so any cancellation of the insurance or guarantee would provide no
economic benefit to borrowers. The FHA program is an insurance program, but it
operates differently than private mortgage insurance. Under private mortgage insurance
programs, only the top 20% to 30% of the loan is insured, so it is reasonable that once a
borrower has equity of 20% or more in a mortgaged property, there may no longer be a
need for mortgage insurance. Under the FHA insurance program, however, the whole
loan is insured. Since the government is always at risk for the whole loan, there is little
rationale for the lender to cancel the insurance.
Current regulations provide, however, that FHA insurance may be canceled upon
request by the borrower and the lender. The decision depends on who owns the loan. If
the loan is owned by Fannie Mae, then Fannie Mae permits the FHA insurance to be
canceled if the borrower and lender agree. If the loan is owned by Freddie Mac, then
Freddie Mac requires that the FHA insurance be maintained as long as the loan is
outstanding. Most FHA loans, however, are part of Government National Mortgage
Association (Ginnie Mae) mortgage pools, and Ginnie Mae permits the insurance to be
cancelled according to the FHA rules.
FHA has revised its rules to provide that, for loans closed on or after January 1,
2001, the annual mortgage insurance premium will be automatically cancelled when, based
on the initial amortization schedule, the loan balance reaches 78% of the initial property
value. Borrowers may also request cancellation of the mortgage insurance when the 78%
loan-to-value ratio is reached due to advance payments by the borrower.