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What Is the Homeowners Protection Act?

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  • Written By: R. Anacan
  • Edited By: Bronwyn Harris
  • Last Modified Date: 28 July 2014
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The Homeowners Protection Act, or HPA, is a law passed in the United States Congress and signed by President Bill Clinton in 1998. It is designed to protect homeowners who have mortgages on their homes that utilize private mortgage insurance, or PMI. The HPA applies to certain residential mortgage loans originated on or before 29 July 1999, although there are some provisions that do apply to loans that were originated prior to that date.

The main purpose of the Homeowners Protection Act is to require mortgage lenders to cancel or terminate payments of private mortgage insurance by a borrower once the balance due on the loan is not more than 78% of the value of the original value of the home, as long as certain conditions have been met. Borrowers also have the right under the HPA to request the cancellation of private mortgage insurance when the loan-to-value reaches 80%. Private mortgage insurance is insurance coverage for mortgage lenders that originate loans to borrowers that are unable to provide at least a 20% down payment on a home purchase. Private mortgage insurance may also apply to borrowers who refinance their mortgage where the new mortgage loan amount exceeds 80% of the current value of the home.

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The private mortgage insurance premium is paid by the borrower to the lender and the premium is added to a borrower’s monthly mortgage payment amount. The amount of the PMI payment will vary depending on the mortgage lender and on the specific situation of the borrower; however the average private mortgage insurance premium is approximately one-half of one percent of the total loan amount. The benefit of private mortgage insurance is that it allows a borrower to obtain a mortgage loan that exceeds 80% of a home’s current value, while providing a means for mortgage lenders to protect themselves in the event that the borrower defaults on a loan.

Prior to the passage of the Homeowners Protection Act, many borrowers would keep paying PMI premiums even after the balance due on the mortgage loan dipped to 80% or below of the home’s original value. In addition to mandating an automatic termination point for PMI premiums, the Homeowners Protection Act also requires lenders to provide and disclose either exactly when the private mortgage insurance payment will cease or when the lender will notify the borrower of the pending cancellation, depending on whether the loan is a fixed-rate or adjustable-rate mortgage. The Homeowners Protection Act does not apply to all types of residential mortgage loans and there are certain requirements that borrowers need to meet before qualifying for some of the protections provided for under the HPA. Those interested in obtaining additional information on the HPA can find a wealth of information on the Internet. A mortgage lender or banker may also be a good source of information in regards to the Homeowners Protection Act.

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Vincenzo
Post 2

@Terrificli -- also, what happened during the "housing market crisis" a few years ago when a record number of homeowners went into default on their mortgages? A good number of those borrowers put nothing down when taking out their loans so we know they were paying private mortgage insurance premiums along with their monthly mortgage payments.

That being the case, was the insurance at all effective when lenders were hit with all of those defaults and closures? We've heard a lot about bank bailouts and how the subprime lending industry was essentially wiped out around 2007 and 2008 due to high mortgage default rates, but were the insurance companies that issued PMI on those bad loans also ruined?

Terrificli
Post 1

Hasn't the rule of thumb always been that private mortgage insurance is required when a buyer has less than 20 percent equity in a home? If so, what were people paying for when their equity popped up over 20 percent? Were lenders still paying private mortgage insurance premiums or not? If not, where did the money go?

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