Homeownership:

Cancellation and Termination Provisions of the Homeowners Protection Act of 1998

RCED-00-50R: Published: Dec 10, 1999. Publicly Released: Dec 10, 1999.

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Pursuant to a legislative requirement, GAO reviewed the Homeowners Protection Act of 1998, focusing on the: (1) act's cancellation and termination provisions for private mortgage insurance; (2) act's high-risk provisions; (3) effect high-risk provisions would have on mortgage lenders; and (4) number and characteristics of residential mortgage loans that are considered high risk and are therefore excluded from the routine cancellation and termination provisions.

GAO noted that: (1) homeowners are generally required to obtain mortgage insurance when they make a low down payment on a mortgage loan; (2) under the act, if the borrower has a good payment history, the borrower may cancel his or her private mortgage insurance when the principal balance of the mortgage reaches 80 percent of the original value of the property securing the loan; (3) if the borrower does not cancel the insurance, the lender must do so when the mortgage balance reaches 78 percent of the original value of the property securing the loan provided the borrower is current on the mortgage payments; (4) however, these cancellation and termination provisions do not apply if the mortgage has high risks associated with it; (5) the act does not define this term but stipulates that conforming loans (limited to $240,000) may be designated as high risk in accordance with guidelines established by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac); (6) for mortgage loans of more than $240,000 (nonconforming loans), the lender can define what constitutes high risk; (7) Fannie Mae and Freddie Mac have not defined high risk; (8) instead, they have decided to treat all conforming mortgages the same way and not apply the act's high-risk provisions for cancelling or terminating private mortgage insurance to specific mortgages; (9) therefore, the act's exception for high-risk loans has had no effect; (10) GAO believes that a mortgage lender would gain little by invoking the high-risks provisions for a mortgage of more than $240,000 because these provisions do not explicitly stipulate that the borrower have a good payment history or be current on a loan; (11) as a result, GAO believes there is a disincentive for lenders to invoke the high-risk exception; and (12) GAO believes that attempting to determine the number and characteristics of high-risk mortgages would not produce information helpful to decisionmakers for two reasons: (a) Fannie Mae and Freddie Mac have decided to treat all mortgages the same way and not apply the act's high-risk provisions for cancellation; and (b) there is a disincentive in the act for lenders to define mortgage loans of more than $240,000 as high risk.

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