Disclosure Rules About Mortgage Insurance

January 8, 2001 "I was never told that I had to purchase private mortgage insurance until closing, when it was suddenly dumped on me. I was furious. Do I have any recourse?" Knowledgeable borrowers understand that if they make a down payment less than 20% of the value of the property, they probably will be required to purchase private mortgage insurance, referred to by the industry as "Private MI" or PMI. If they don't know it beforehand, however, they won't discover it from the Truth in Lending statement they receive from the lender because it isn't there. It isn't on the Good Faith Estimate of Closing either unless they elect to pay the insurance premium upfront in cash, which very few do. Under Federal legislation passed last year, lenders are obliged to disclose PMI "at the time the transaction is consummated", which presumably means when the note is signed by both parties. Since the note is signed at closing, that�s too late to do a borrower any good. Most lenders disclose well before then, but yours didn�t and you were caught short. I'm afraid you have no recourse because the lender gave you all the disclosures that are required early in the process, and PMI is not one of them. If it is any comfort, however, it probably would not have made any difference had you known, for reasons indicated below. "I recently discovered I was paying a mortgage insurance premium almost twice as large as my neighbors. Is there a good reason for this?" PMI premiums vary by type of loan, purpose of loan, down payment, and the amount of insurance coverage required by the lender. The difference in premium could be due to any of these. When these factors are the same, differences in premiums are usually very small. Insurance coverage refers to the maximum loss that the insurance will cover. The higher the coverage, the less the risk of loss to the lender or investor. Coverage standards are largely dictated by Fannie Mae and Freddie Mac, the two Federal agencies that buy a large proportion of the loans sold by lenders in the secondary market. Copyright Jack Guttentag 2002

Jack Guttentag is Professor of Finance Emeritus at the Wharton School of the University of Pennsylvania. Visit the Mortgage Professor's web site for more answers to commonly asked questions.

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