June 2011

Mortgage Insurance Cancellation: The Myths and Realities

When it comes to private mortgage insurance (MI), there are several myths that exist that make buyers reluctant to consider a conventional loan with MI as an option when purchasing a home. One of the more common misconceptions is that cancelling MI is a difficult—not to mention time-consuming—process.

The irony is that the majority of buyers don’t harbor those same beliefs or reservations about an FHA insured loan when, in reality, FHA coverage may be less easily cancelled, or take longer to cancel, than MI.

HPA Makes Cancellation Clearer
When it went into effect as a new federal law, the Homeowners Protection Act (HPA) of 1998—which applies to both FHA and MI insured loans—required lenders and servicers to provide disclosures regarding MI for residential loans obtained on or after July 29, 1999. Prior to this, consumers were responsible for requesting MI cancellation if they met two factors: one, their loan balance was paid down to 80 percent of the property; and two, they had a good payment history.

While many lenders obliged consumer requests to drop MI coverage, consumers had sole responsibility for keeping track of their loan balance.

The HPA established three different times when a lender or servicer must notify consumers of their rights.

At loan closing, lenders must disclose:
• The right to request MI cancellation and the date on which the request can be made
• The requirement that MI be automatically terminated and the date on which this will occur
• Any exemptions to the right to cancellation or automatic termination
• A written initial amortization schedule for fixed-rate loans only

Each year, loan servicers must send borrowers a written statement that discloses:
• The right to cancel or terminate MI
• An address and telephone number to contact the loan servicer for determining when MI may be cancelled

When MI coverage is cancelled or terminated, lenders must send a notification to borrowers stating:
• MI has been terminated, and the borrower no longer has MI coverage
• No further MI premiums are due

Termination of Coverage
Under the terms of the HPA, mortgage lenders or servicers must automatically cancel borrower-paid MI coverage when the mortgage has amortized to 78 percent of the original property value, with all unearned premiums returned to the borrower within 45 days of the cancellation or termination date. This provision also requires that the borrower be current on mortgage payments required by the terms of the loan, and if the loan is delinquent on the date of automatic termination, a lender must terminate the coverage as soon as the loan becomes current.

Cancellation of Coverage
Also under the HPA, a homeowner has the right to request MI cancellation when the mortgage balance reaches 80 percent of the original property value. All payments must be current, meaning a homeowner must not be 30 days late on a mortgage payment within one year of their request, or 60 days late within two years.

However, a borrower can only initiate a cancellation request for FHA based on their prepayment of the loan, and even then, it can only be requested beginning five years after the loan origination date.

With MI, homeowners can request cancellation based on prepayment of the loan, as well as an appraisal. Despite falling property values, it’s possible for homeowners to gain enough equity in their home to request cancellation in less than five years based on a home appraisal.

Why This Matters to Agents
By understanding these rules and what they mean for homeowners, real estate agents can educate their buyers to help them better evaluate allof their home financing options based on facts rather than myths.

This is even more important considering the FHA’s recent price increase, which has reduced buyers’ purchasing power and increased monthly mortgage payments.

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What’s in Store for Summer – Is It Auction Season?

Summer is renowned as the ‘vacation season’ where even thriving companies tend to slow down. Real estate is notoriously sluggish during the summer months, but with the consistently high number of foreclosures flooding the market, could this be a potentially lucrative season for real estate auctions?

According to last year’s data, PropertyAuction.com had a plethora of listings in summer 2010. The month of June saw 5,044 listings of both commercial and residential auctions combined, July came in at 5,649 total auctions, and August proved to be a very busy month with a total of 9,912 auctions listed. None of the summer months were at the bottom of the inventory list—the lowest amount of auction listings were in January, February and April, respectively.

It’s a well-known fact that the increasing foreclosure rate continues to depress the housing market. After last year’s robo-signing scandal, the foreclosures held back in 2010 are making a reappearance, which places a great burden on traditional sales. Msnbc.com reports, “foreclosures are expected to remain elevated through the year as homeowners contend with stubbornly high unemployment, tougher credit standards for refinancing and falling home values…The decline will push more borrowers underwater on their mortgages. Already, about one in five homeowners with a mortgage owe more than their home is worth.” Some could speculate that this can possibly trigger a substantial inventory of real estate auctions.

Dan Mahaney, accredited auctioneer of real estate, has seen that certain types of auctions excel at different times of the year. “Spring and fall are busy times for land sales. Fall is always the busiest time of the year. Sellers are looking to convert assets into cash before the end of the year,” he says. “It just seems there are never enough weekend sale dates in the fall to accommodate a seller’s request.” As for the summer months, Mahaney states, “Vacation homes always sell well during the peak summer travel months in destination locations. Colorado summer sales are always strong due to the increase in outside traffic, especially with buyers from Texas looking to escape the Texas heat. Midwest farm ground still appears to be the hottest asset in demand. Strong commodity prices make this a strong hold, at least for the time being.”

This proves to be true: Farmers National Company is already posting their June land auctions in Nebraska, Missouri and Iowa. On upper-tier listings, luxury property auction companies such as Grand Estates Auction Company, J.P. King, and Premiere Estates Auction Company each have several key properties slated for June.

In short, the summer season can still be a tough read for the real estate auction business even at mid-Spring, but as of now industry professionals are planning on keeping pretty busy.