Chase Bank - Chase forcing me into bankruptcy overcharging insurance on a $55K mortgage loan

Posted by Mario The Great on 2012-02-14:

You have to initiate the process (at least until the loan's balance is paid down to 78% of the home's value at the time it was purchased). And yes, the lender has to approve, but only until an 80% loan-to-value ratio is reached. Then, the Homeowners Protection Act of 1998 kicks in, requiring lenders to automatically cancel coverage if you ask for it.

However, what puzzles me is why you have mortgage insurance in the first place. It is usually only required of borrowers who put down less than 20% of the loan amount, because it has been shown that those folks are more likely to go into default than those who have more skin in the game. By my calculation, you've paid more than 50% of the loan amount. If that's the case, your payments are more than enough to eliminate the need for PMI.

But back to your question. Many people look at mortgage insurance as an unnecessary expense, but I look at it as more of a necessary evil. Nearly 12 million families in the last 12 months alone have become homeowners thanks to PMI.

No, it isn't cheap. But someone paying $100 or so a month extra for mortgage insurance can purchase a house 10 years sooner than they might have otherwise and with as little as 3% down -- or even less for some qualified borrowers. Otherwise, they'd either have to wait until they scraped together the necessary 20% down payment or perhaps take out an even more expensive second mortgage.

Lenders accept the insurance as a substitute for the part of the down payment that is missing. The less money the borrower puts up, the more expensive the coverage. And worse, perhaps, is the fact that even though you pay the premium, the insurance protects the lender in case you default on the loan.

People used to have a devil of a time getting lenders to drop coverage. But that changed seven years ago. You must be up-to-date on your house payments and have no other loans on the house. Also, the lender must be satisfied the property's value has not declined. But otherwise, coverage must be canceled.

Under the law, the lender must cancel coverage at the borrower's request when the loan is paid down to 80% of the property's original value. But if you forget to ask, policies must be terminated automatically when the loan balance reaches 78% of the home's value at the time it was purchased.

Again, your payments must be current. But even if they aren't, coverage must be dropped when you catch up. And you don't have to lift a finger. Cancellation is supposed to be automatic.

However, under rules adopted by Fannie Mae and Freddie Mac, the two giant financial institutions which keep the vaults of many local lenders fresh with cash for home loans, you can end coverage based on your home's current value as opposed to its original value. That's a huge difference.

Say you put down 5% on a $200,000 house with a 6% 30-year fixed-rate mortgage. If you simply sit on your duff and do nothing, your PMI coverage will end automatically in 11 years.

But if your place is appreciating in value at an annual rate of, say, 5%, you'd build up enough equity to meet Fannie and Freddie's rules after just 36 months, according to United Guaranty, one of the nation's seven mortgage insurance companies. If you happen to live in a place where housing is really hot and prices are rising at 10%, you'd reach the cancellation point in a mere 20 months.

Of course, the two secondary market institutions have their own set of rules by which lenders and their customers must abide.

You can't cancel coverage until your loan is at least two years old unless you've made significant improvements to the property. If the loan is between two and five years old, you must have paid the loan down to 75% of current value. But if yours is a "seasoned" mortgage that has been on the books for at least 60 months, your loan-to-value ratio need only be 80%.

In addition, you must have a good payment record, with no payment more than 30 days late over the last 12 months and none more than 60 days late within the last 24 months.

Not every lender abides by Fannie Mae and Freddie Mac's rules. The two government-sponsored enterprises touch only about half of the all loans originated. But they are so powerful that most lenders follow their edicts, especially if they intend to sell their loans sometime in the future.

Chances are that lenders who don't meet the GSEs' requirements are more strict about canceling coverage. But some could be more liberal.

The rules may seem a little daunting, but they are fairly cut and dried. First, you'll want to make sure your loan is at least two years old. If it isn't, PMI can't be released, no matter how much your house is worth now -- at least not unless the increase is attributable to a structural improvement you've made to the place; say, a finished basement, for example, or an addition.

Next, make sure you have a good payment record. After that, you'll want to make sure you have enough equity. If you don't have a good handle on that, spend $25 or so for an automated valuation, a kind of shorthand electronic appraisal that will give you a ballpark figure. Then, if it looks like you have enough equity to satisfy the rules, you can proceed with a full-blown, $300-$350 appraisal. But don't rush out and pay for an appraisal yourself. The lender will order one your behalf.

Mortgage Insurance Cos. of America, the trade group for private insurers, has a helpful Web site at www.privatemi.com that outlines the steps to follow for the most painless cancellation process, including sample letters you can use to get the ball started. Go to the MICA site.

Posted by macdave on 2012-02-14:

Mario, great write up on PMI and very informative. I think the writer was talking about his homeowners insurance, which I am sure the bank requires as part of his mortgage. Unfortunately for the poster may be out of luck unless he can find a policy he is able to afford and cancel the policy the bank took out on his behalf to protect their interests.

David

Posted by *Brenda* on 2012-02-14:

Mario - the OP said Homeowners' insurance not PMI.

That is something that I would never expect a loan company to risk. Although it makes me wonder why the insurance is so much. My house is about the same value and I only pay 600 a year.

Posted by Venice09 on 2012-02-14:

$5-6k a year for homeowners insurance? That sounds impossible. Is there a reason you can't find insurance on your own for a fraction of that price?

Posted by Mario The Great on 2012-02-14:

Man, I think I need new glasses. He did say Homeowners. Why not try Progressive or Farmers? They are much more affordable than Bank insurance.

Posted by clutzycook on 2012-02-14:

Wow Mario, I did not know that. Not that I would consider dropping my homeowner's insurance. The day I do that is the day that Murphy's Law will rear its ugly head on my property and I'll be out a lot more than my deductible, LOL. My husband and I had a PMI on our house when we first bought it, but about 3 years in, we refinanced and the broker was somehow able to get the PMI eliminated.

I'm rather concerned about the OP paying 5-6K/yr on homeowner's insurance, though. I pay about $5-600 a year (can't remember the exact amount right now)and even I think that's a little steep. I understand that he is in Florida and maybe he has a hurricane insurance attached to his policy (I'd be shocked if he didn't), but it shouldn't be 10 times what it costs here in the lovely midwest, should it? My advice would have been to investigate other insurance companies before dropping the coverage completely. Obviously, the bank doesn't like it when that happens (they want to protect their investment after all).

Posted by Inat on 2012-02-15:

i think there is some confusion or wrong information - i cant imagine HO insurance being 5-6k unless you're in a house made of straw in the middle of a dead and dry forest with a grumbling volcano next door :)

Posted by traceylynn on 2012-02-15:

Homeowners insurance is not optional at all. In fact in your mortgage contract there is a form you have to sign that states you will carry homeowners insurance at all times and if you do not they do have the right to 'force-place' insurance on the property. Not only that but if you had a fire or a theft you would be up a creek. Please please PLEASE get coverage ASAP~!!!!
The 'force-placed' insurance will only cover the structure, it does not cover your personal contents. So as of right now you are still at risk for a (possibility) devastating financial loss!

Posted by Nohandle on 2012-02-15:

I have a number of friends with vacation property in Florida. After the last hurricane that came rolling through some insurance companies stopped writing homeowner's insurance in Florida period. I don't recall the exact amount for premiums but when they were able to find coverage were shocked at the increased price. These were individuals who had never filed a claim of any sort and also owned their property so there was no mortgage company involved.

Posted by Venice09 on 2012-02-15:

I found this on City-Data.com forum about the cost of insurance in Florida.

Question: Is the Homeowners Insurance still outrageous? Say I want to buy a $250,000 home. Can you give me an idea of what it will cost to get into the home and what the Insurance rates will be? Isn't there impact fees? etc?

Answer: You only need dwelling coverage - replacement cost - new. You will not need to cover the land. If the home is $250,000, then your dwelling coverage would be around $160,000 give or take. And yes, if you have hurricane shutters, HIP roof, age of roof and alarm system - those will lower the quote. Also, the age of the home comes into play as well.

I have dwelling coverage of $378,000 and I pay $2960 per year FYI. I just checked the website above but my insurance company (State Farm) shows I should be paying $7092 per year. My rate was close to that for 2 years, however, with my new roof (2003), HIP roof, alarm system monitoring and hurricane shutters, it was brought down to the $2960 per year which is close to the amount I used to pay.

Wow!.. That's crazy. If the OP can afford some improvements on the house, it might bring the price of insurance down. But it doesn't sound like that's an option.

Posted by Nohandle on 2012-02-15:

I'm wondering if dwelling insurance also covers contents, liability and everything else that goes along with homeowner's insurance? I sincerely doubt it. That's usually what brings the premium prices up to the staggering amount.

Posted by CowboyFan on 2012-02-15:

People living in Miami should pay more for homeowner's insurance. I live in Orlando, and there is a state surcharge on my homeowner's and automobile liability policy to pay for the state sponsored homeowner's coverage which provides lower rates, than commercial, for people who buy expensive homes near the coast. Make them pay the full amount is my belief.

My house (not land) in Orlando is probably worth $100,000, and I pay $2,300.00 per year on home owners insurance, with large deductibles (content coverage also). The reality is that homeowner's insurance is expensive in Florida because of hurricanes.

Look at it this way. In light of the hurricanes and wind damage in Florida, would you personally risk $160,000 to earn $6,000 per year, when it would take 26 years of no claims to make up a total loss? Knowing the possiblity of storm damage in Miami during the next 15 years, I would not bet $160,000 to earn $6,000 per year - it would certainly have to be much more. Insurance companies take the same risks.