Alabama Consumer Credit Lawyer Judson E. Crump discusses how dumb mortgage servicers can be.
Private Mortgage Insurance (PMI, as it is affectionately abbreviated) is one of the many features of the “new” housing market. For those of you who don’t know, PMI is basically an additional fee that is charged to a borrower who cannot afford to make a 10% or 20% down payment on a home. PMI usually adds a couple hundred dollars to your monthly mortgage payment, and you don’t get anything in return for the money. It exists entirely to compensate the bank for the risk of lending to you. Needless to say, it’s a bad deal and you should avoid it if you can. If you already have a loan with PMI, you need to cancel it as soon as possible.
First, a brief summary of what private mortgage insurance is. The idea is this: traditionally (like 30 years ago), you couldn’t get a mortgage without coming up with 20% of the purchase price of your home. But even though most people can’t afford a 20% down payment, banks still want the assurance of having a 20% equity cushion to protect their investment in your home. At the same time, they don’t want to turn away the millions of borrowers who want to buy houses with less than 20% down payments. So here’s the solution: they charge you extra for the privilege of borrowing without having 20% down.
I really have no idea why it is called “private,” but I do agree that in a way, it is “insurance” that you won’t default on your loan. Or rather, it is insurance that of the thousands of PMI-burdened loans in a given lender’s portfolio, only a few will default before the bank gets its 20% equity cushion, and therefore the millions of payments made by the majority of the borrowers will more than compensate the banks for the risks they took issuing the loans in the first place.
As much as the banks would love to stick you with 20 years of PMI premiums, there is a law that was passed in 1998 (Clinton was president, and Britney Spears came out with (Hit me)”…Baby One More Time“) that prevents them from doing that. Once you have racked up enough equity in your home so that the balance of the mortgage is 78% of the original value of the property, the bank MUST cancel the PMI. This will cause your mortgage payment to go down a significant amount. But here’s the kicker: at 80% of the original value, you can write the bank a letter requesting that they cancel it, and they have to do so. On the average 30 year mortgage loan in Alabama, that means that if you don’t notify the lender that you want PMI to stop, there will be about 9 months where you’re paying about $150 more than you have to! That is as crazy as it sounds.
So here’s how to avoid it.
1. Calculate the 80% threshold you need to cross. You do this by using the appraised value of the home at the time you got the loan. If home prices have gone down, that is the bank’s problem, not yours. They are not entitled to a permanent equity cushion. So if you bought a $200,000 home in 2004 and borrowed $175,000, then you can cancel PMI once your unpaid principal balance is $160,000. It doesn’t matter if the home is now worth $100,000 or $500,000.
2. Look at your amortization schedule and mark the date that you’re expected to cross that threshold. Be sure to keep track of any overpayments. If you’re prepaying $100 per month, then you’ll get there before the amortization schedule says so.
3. Write the bank a letter the day you cross the line. It doesn’t have to be fancy lawyer stuff. Just say: my principal balance is now less than 80% of the original value of the property, and therefore I demand that you cancel all Private Mortgage Insurance related to this loan.
4. Enjoy saving hundreds of dollars. Once you’ve notified them of your request to cancel PMI, you have no further responsibility to pay PMI.
5. Make sure they respect your request. Sometimes mortgage companies “lose” paperwork or just ignore your requests. If the mortgage servicer continues to charge you for PMI, they are breaking the law. Write a second letter disputing any PMI charges or late fees that may have resulted from their failure to treat your non-PMI payment as an incomplete payment. Also dispute their reporting of the incomplete payment on your credit report. If they don’t fix it, call a lawyer.
OK, sometimes it can be slightly more difficult. The mortgage servicer can request that you provide proof that the property has not declined in value. This usually means some sort of written valuation report, like a tax assessment, an appraisal, or a Broker Price Opinion from a realtor. If you have to hire an appraiser, let them know beforehand the purpose of the appraisal. Your goal is to show that the property has not declined in value, so you want an appraisal that shows that the property has kept its value or even appreciated.
How do you fix a problem you’re having with your mortgage company? Most of the time, you can do it without hiring a lawyer or going to court.
But if you try to get it done with a quick phone call, you’ll probably just get that familiar message: “We’re experiencing unusually high call volume. Please hold for the next available operator.” And you hold and hold and the Indian kid that finally answers the phone is an overworked, underpaid peon who has no authority to do anything more than repeat what his computer tells him about your account.
So you write a letter. But not just any letter. A special kind of letter, one that your mortgage servicer is required by law to acknowledge within 5 days. You write a Qualified Written Request.
If you search the internet for an example of a Qualified Written Request (QWR), you are likely to find a lot of documents that claim to be QWRs, but really are not. Why? Because most of the “QWRs” out there are just blanket requests for information, demanding all sorts of loan documents and other things. Mortgage servicers have no obligation to respond to a request that doesn’t “state the reasons for the belief of the borrower that the account is in error.” Walker v. Equity 1 Lenders Group (S.D. Cal. 2009).
Here is what makes a QWR a QWR:
1. You specify particular errors or omissions that you believe to exist with the account. For instance, you may believe that you were wrongfully assessed $15 “property preservation fees” for 3 months. You need to state that fact in your letter.
2. QWR response requirements only apply to servicers, not the originator or the holder of the mortgage. This is usually the people who send you a statement every month. If you receive regular statements, look on the back of the statement for a Qualified Written Requests address. This may be different from the regular correspondence address and the payment address. If you don’t send it to that address, you may not be able to hold them liable for failing to respond.
3. Demand specific information. DO NOT send a gigantic list of requests for documents. The new CFPB regulations 1024.35 specifically exempt servicers from liability in response to an overbroad request. You can request documents, but they must relate to your dispute. For instance, if you are disputing the servicer’s right to charge you force-placed flood insurance, then you can rightfully request:
- Proof that the policy was paid for;
- The identity of the insurer;
- The provision in the mortgage and note that allows them to charge you such fees;
- Declarations pages and other documents relating to the insurance policy;
- Flood zone certification.
If your only problem is that they’re charging you bogus flood insurance, that does not give you the right to demand a copy of the appraisal used when you bought the house back in 2007.
4. Demand specific corrective action. This should be obvious, but it is something that a lot of people fail to do because they’re more concerned with getting documents and hoping to find a technical violation they use against their lender. The purpose of the QWR and the Notice of Error is to help you and the bank correct mistakes without having to go to court. If you don’t tell them what you want fixed, you can’t hold them liable for failing to fix it! So if they’ve assessed you $45 of bogus “property inspections,” you need to demand that they credit you for that $45, plus any interest or other fees that arose from your not having paid that amount. You also can request that they fix any mention of such account on your credit report.
HERE is a sample QWR that demands information relating to insurance and property inspection fees. Sample QWR
NOTE: There are two exceptions to the rules that a QWR relate to a specific dispute. Even if there is no evidence of a mortgage company doing anything wrong, you always have the right to know a) who owns your mortgage and b) what is the payoff amount. The Dodd-Frank Amendments to TILA allow you to request the identity of the holder of your mortgage note at any time and without being charged a fee. 15 U.S.C. 1641(f).
In Alabama, your QWR should mention that you demand a payoff statement pursuant to Ala. Code Sec. 35-10-91. Alabama law provides a specific right to know the payoff amount for your loan.
The QWR can be a very useful tool for fixing account errors and learning why you have been charged amounts you may not legitimately owe, but it must be used judiciously and done properly. If a bank refuses to acknowledge your QWR within 5 days or correct/explain the mistake with 30, then they are liable to you for any damages you sustain as a result. You can do this.