A district court in Alabama dismissed a class action against Freddie Mac filed by borrowers seeking to have their mortgage insurance obligations automatically canceled and be notified when the change takes effect.
Consumer activists, lawyers, and Congress have been up in arms lately over the same issue. Legislation was introduced two weeks ago in the Senate and House that would require lenders to tell borrowers when mortgage insurance is no longer necessary.
The homeowners who filed the suit alleged that Freddie Mac, formally the Federal Home Loan Mortgage Corp., committed "deceptive acts and practices" by failing to notify borrowers when they could cancel their mortgage insurance.
Freddie Mac and Fannie Mae require borrowers to buy mortgage insurance if they make less than a 20% down payment. Typically, borrowers can stop paying for insurance once they own 20% of the home, as long as there have been no problems with late payments.
In her ruling last month to dismiss the suit, Judge Sharon Lovelace Blackburn of the U.S. District Court for Alabama's northern district wrote that the borrowers had standard mortgage contracts that had no provision to automatically cancel the requirement that they carry mortgage insurance.
"While the notion that borrowers at some appropriate time should be relieved of their obligation to pay for mortgage insurance premiums may have some equitable appeal, the standard-form mortgages, which plaintiffs signed, do not provide for such a right," she wrote.
John Morland, vice president and deputy general counsel for Freddie Mac, said the agency's Seller/Servicer Guide has provisions related to cancellation of mortgage insurance, and that it is up to the servicer to decide if a borrower can cancel mortgage insurance.
The latest ruling is consistent with rulings in similar cases. Last year courts in Texas and Michigan dismissed cases filed against Fannie Mae and a servicer, Old Kent Mortgage Services.