House Panel Approves Bill To Stop Mortgage Insurance When Equity

The House Banking Committee approved legislation Thursday that would automatically cancel private mortgage insurance when a borrower's equity in a home reaches 25%.

The bill also would require lenders to make annual disclosures showing how much a borrower would have to pay on the loan to avoid mortgage insurance.

The automatic cancellation provision was a victory for Democrats, who insisted that consumers have the right to end insurance coverage. Borrowers could save $300 to $900 in annual premiums upon dropping coverage, according to a committee estimate.

The bill would apply only to mortgage loans made one year after the bill's enactment.

"Private mortgage insurance is not necessary once the borrower has obtained sufficient equity and developed a good payment record," said Rep. Henry Gonzalez of Texas, the committee's ranking Democrat.

The bill was sponsored by Rep. James Hansen, R-Utah. He drafted it after becoming frustrated with his own attempts to cancel mortgage insurance on his Northern Virginia condominium.

The original version was much narrower than the one approved Thursday. Rep. Hansen had sought only to require lenders to disclose annually the requirements for canceling coverage.

House Banking Committee Chairman Jim Leach praised the bipartisan support for the bill, which was approved 37-1. He said the proposal was a "good-faith effort to provide homebuyers with information they need to avoid unnecessary insurance payments without jeopardizing the prudential underwriting guidelines of mortgage bankers or the secondary markets."

Specifically, the bill would amend the Real Estate Settlement Procedures Act to require:

Disclosure when a mortgage is originated that private mortgage insurance is required and that coverage may later be canceled.

Annual notice of what it would take to terminate coverage.

Automatic termination when a borrower's equity reaches 25%.

At the urging of Rep. Maxine Waters, D-Calif., the committee by a vote of 22-12 eliminated a provision that would have preempted state laws on mortgage insurance disclosure.

Several Democratic members were disappointed that the bill did not cover mortgages already held by consumers.

"This bill doesn't adequately address the problems of current borrowers," said Rep. John LaFalce, D-N.Y.

The Senate Banking Committee is expected to take up similar legislation after April 6 when lawmakers return from an Easter recess.

The Senate panel was to have voted March 18 on a plan that would have automatically canceled coverage when a borrower's equity reaches 20%. However, committee Chairman Alfonse M. D'Amato, R-N.Y., said he needed more time to work out a bipartisan deal. u

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