So where's the problem? In the view of a top Capitol Hill housing expert, LPMI may not be as attractive a deal as consumers think. The chairman of the House subcommittee on housing, Rep. Rick Lazio, R-N.Y., points out what he believes is a potentially expensive flaw in the concept: Under lender-paid insurance, the borrowers irrevocably give up their right to ask for termination of the monthly premium charges once their home equity exceeds 20 percent. That's because the LPMI insurance premium is built into the mortgage rate and continues for the life of the loan - even if the lender cancels the insurance coverage on its own and continues to pocket the premiums for years.

"The fundamental issue at stake," said Lazio in a letter to Housing and Urban Development (HUD) Secretary Henry Cisneros, "is whether the federal government should require full and exhaustive disclosure to borrowers of any loan product that trades a few dollars in upfront mortgage insurance costs for additional thousands in interest payments down the road."

Lenders and insurers say the basic mechanics of LPMI are adequately disclosed to consumers without detailed federal guidelines. But Lazio is unconvinced. He wants clarification - or tougher federal requirements for disclosure - from Cisneros' agency, which has regulatory authority for consumer protection on mortgage closings.

Consumers should be aware

A department official says a response to Lazio is in draft form, but declined to reveal HUD's position on LPMI. In the meantime, though, consumers should be aware of the critical feature of LPMI that Lazio's letter highlights: If your loan is likely to be for the long term, your lender will be free to cancel your mortgage-insurance policy unilaterally, while continuing to collect your premium dollars as part of your monthly interest payment for the life of the loan. That's sweet for the lender, but could be costly for you.

Another issue pending before Cisneros' agency: Should it be legal for mortgage lenders to set up side joint ventures with mortgage insurers to share portions of borrowers' insurance premiums? The details of these ventures are complex but the bottom line is this: The lender who is protected by your insurance winds up with extra profits, derived by creating an insurance subsidiary it jointly controls.

One top industry expert says "there is substantial money to be made here" by lenders if HUD flashes a green light. But a consumer advocate says she thinks the whole concept "stinks." Gale Cincotta, executive director of Chicago-based National Training and Information Center, says lenders joint-venturing with insurers will avoid lower-income city neighborhoods that they see as higher risk.

And they'll also be reluctant to cancel other borrowers' insurance policies when they reach the 20 percent equity threshold "because it will cut their income stream."

"There's an inherent conflict when you're both the lender and the insurer on a mortgage," said Cincotta. A HUD official would only say "we are reviewing" the issue.

(Copyright, 1996, Washington Post Writers Group)