The bill would require automatic cancellation of mortgage insurance once owners build up enough equity -- about 25 percent -- to secure their loans. The payments can range from less than $20 to more than $100 a month, depending on the size of the mortgage. The bill also requires lenders to tell owners of their right to cancellation every year on their annual statements.
As many as 250,000 homeowners are paying for mortgage insurance coverage because they either don't know it can be canceled or can't persuade lenders to cancel it, said Rep. James V. Hansen, R-Utah, sponsor of the bill. Current law doesn't require lenders to cancel at any time, he said.
"We're finding that very, very few lenders take it off. They think of one way after another to hassle people," Hansen said. "That means some servicers -- banks, insurance companies -- are literally putting millions of dollars in their back pockets and people don't realize they're doing it."
"This is the most significant consumer bill brought up in Congress this year," said Rep. John LaFalce, D-N.Y.
Private mortgage insurance, commonly called PMI, protects lenders from losses should owners default. Lenders usually require it from homeowners making down payments of less than 20 percent.
During debate on the House floor, lawmakers praised the private mortgage industry for making it easier for people to buy homes with low down payments. But as a homeowner builds equity, the risk of default usually goes down, and the insurance becomes unnecessary at some point, they said.
In most cases, homeowners are not aware that the insurance has become unneeded and they may continue to pay premiums on it for years.
About 5 million U.S. homeowners are repaying mortgages that are covered by private mortgage insurance, and nearly 5 percent of them could be eligible for cancellation, according to the Mortgage Companies of America, a trade group for private mortgage insurance companies.
Under Hansen's bill homeowners would be eligible for automatic cancellation once they have reached a loan-to-value ratio of 75 percent, based on the original purchase price. Cancelations could occur if a homeowner can prove a 75 percent loan-to-value ratio based on a more recent appraisal, however.
Sen. Alfonse D'Amato, R-N.Y., who has called unneeded mortgage insurance "nothing less than the fleecing of the American homeowner," introduced a similar bill in the Senate.