Homeowner's Protection Act - Explained
What is the Homeowner's Protection Act?
Written by Jason Gordon
Updated at April 4th, 2023
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Back To: Real Estate, Personal, & Intellectual Property
What is the Homeowners Protection Act of 1998?
The Homeowners Protection Act is a government regulation that came into force in 1998 as a measure to protect homeowners from the liability to pay for private mortgage insurance (PMI) when deemed unnecessary by law. The act also makes it obligatory for financiers to divulge to homeowners details about any PMI applicable to a mortgage. The Homeowners Protection Act also makes it mandatory for lenders to terminate the PMI automatically for homeowners who accrue the requisite amount of equity in their homes.
What Does the Homeowners Protection Act Do?
The Homeowners Protection Act protects homeowners who purchased private residential mortgages after July 29, 1999. However, Veterans Affairs (VA) and Federal Housing Administration (FHA) loans are out of bounds for this act. PMI shields financiers from the risks involved with loan default and foreclosure, while empowering potential homeowners to obtain mortgages at reasonable rates. PMI also simplifies the process of disbursement of high-ratio loans, i.e. loans with loan-to-value (LTV) ratios exceeding 80 percent. PMI also facilitates a financier to recover costs related to the resale of foreclosed. PMI is discarded after a mortgage loan balance falls below the 80 percent loan-to-value ratio since it virtually ceases to offer protection to the lender, nor does it help the borrower in any way anymore.
Background of the Homeowners Protection Act
The Homeowners Protection Act was formulated to facilitate stress-free cancellation of PMI by homeowners. Until then, PMI cancellation had proven to be quite an arduous task for the borrower who had to wait for his/her home equity to drop to 20 percent for the lender to initiate cancellation procedures. In worse cases, lenders refused to cancel PMI, leaving the borrower with no viable legal recourse. The act shields borrowers by proscribing life-of-loan PMI coverage for PMI products paid for by the homeowner and instituting uniform measures for cancellation of PMI across the country. Financiers have used and in some cases, exploited the 80 percent loan-to-value ratio as a lending standard wherein they disburse loans with a 20 percent down payment. Such an arrangement guarantees sustained fiscal interest in the property on the part of the borrower and ensures that he/she continues making interest payments on the mortgage. It also makes foreclosure a less risky proposition for the lenders by ensuring that they have enough equity available. Even so, with steeply escalating property prices, it came to be increasingly difficult for potential homeowners to pay even 20 percent of the assessed property value as down payment. For the sake of continued business, lenders had to start disbursing loans outside the 80 percent loan-to-value threshold. Nevertheless, as demand for home loans gained momentum, lenders started favoring arrangements that involved PMIs in order to mitigate risks associated with loans that allowed down payments below 20 percent of the sale prices.
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