Since the risk of loss to the lender diminishes as the borrower's equity stake grows beyond the 20 percent level, large investors like Fannie Mae or Freddie Mac permit cancellation of insurance coverage under certain circumstances. Freddie Mac, for instance, allows cancellation upon written request of some owner-occupant borrowers with 20 percent or higher equity stakes and excellent payment histories. Other conditions may apply as well: A minimum of two years must have elapsed from the closing date of the loan, and a current market appraisal - at the borrower's expense - may be required.
The new class action suits over insurance cancellation charge that lenders and mortgage insurers deliberately collect huge amounts of premium dollars from consumers long after the need for insurance has passed. Charles Zimmerman, a Minneapolis-based attorney whose firm, Zimmerman Reed, has filed half a dozen suits against lenders recently, put it this way:
When a homeowner's equity stake is 30-40 percent of the market value of the house, "where is the risk?"
In one pending case, Zimmerman's firm has sued Twin City Federal Mortgage Corp. and MGIC, alleging that they "actively conceal" borrowers' rights of cancellation, and the criteria for qualifying for cancellation. The suit also charges that Twin City Federal Mortgage receives "commissions or servicer fees" for selling, processing and forwarding premiums to MGIC - thereby "unjustly enriching" both defendants.
Representatives of both Twin City Federal Mortgage and MGIC deny the suit's allegations. Twin City vice chairman Robert Evans says the mortgage that triggered the suit is owned and serviced by his firm and carries insurance cancelable only at the request of his firm.
"The (mortgage insurance) contract says insurance will be maintained for the life of the loan," Evans said. He also denied that his firm receives any upfront or periodic compensations from MGIC for maintaining insurance coverage.
A spokesman for MGIC emphasized that a mortgage insurer's role is straightforward regarding cancellation: "If a lender or investor tells us to cancel (a policy), we cancel . . . It's totally up to the the lender or investor."
Class action suits will likely shine new light on this process, and could have wide-ranging effects on homeowners nationwide. In the meantime, here's some practical advice for home buyers, refinancers and owners whose loans carry mortgage insurance:
-- Ask your lender to explain when and under what circumstances you could terminate payments.
-- Don't expect lenders to notify you when you qualify for cancellation. You've got to make that request, in writing.
-- Even if your lender maintains a general policy of "no cancellation" of mortgage insurance, your situation may be compelling and worth an exception. What if you get nowhere with a reasonable request? In a low-interest rate environment, you always have the right to pull the plug by refinancing.
(Copyright, 1995, Washington Post Writers Group) |
