This Week's Q & A

Q: We understand, from your column and other sources, that lenders must terminate private mortgage insurance automatically when the loan balance reaches 78 percent of the original purchase price, or (on the borrower’s request), when the balance is 80 percent of the original property value. We are wondering if there are any special rules governing the appraisal requirement. We bought our house for $125,000 in 1986 with a down payment of $13,000, obtaining a mortgage of $112,000. We refinanced in 1993, obtaining another 30-year loan. Our balance now is $97,500. When we contacted he loan servicer about eliminating our PMI, we were told that we had to verify the current value of the house. The servicer offered two options: Obtain an appraisal on our own (a local appraiser told us the fee would be $250) or pay the servicer for a “broker’s price opinion,” at a cost of $150. We selected the les expensive option, but are wondering if it was legal for the servicer to require the appraisal (if cancellation is supposed to be automatic) and if so, to require us to pay the servicer to obtain the reduced appraisal fee?

A: You’re raising two separate questions: one about the PMI cancellation process, the other about the fees a lender or loan servicer can charge. Both are reasonably complicated. Starting with PMI, the law requiring automatic or borrower-initiated cancellation of PMI applies to loans originated on or after July 1, 1999. Neither your original loan nor your refinance mortgage falls into that category. Both Fannie Mae and Freddie Mac have adopted separate rules for loans they purchase, requiring lenders to cancel PMI at the midpoint of their loans – 15 years on a 30-year mortgage. You would have met that requirement under your old mortgage, but not under the refinanced loan. Fannie and Freddie’s’ rules also allow borrowers to request the elimination of PMI once their loan-to-value ratio reaches 78 percent of the current value. I assume your house has appreciated considerably since you bought it in 1986, so you almost certainly meet that requirement. It is possible that an investor other than Fannie or Freddie purchased your mortgage, in which case, different rules might apply. In any event, the servicer can legally require you to document the current value of your property as a condition for eliminating PMI.

A separate law, the Real Estate Settlement Procedures Act (RESPA) governs the fees that lenders and other participants in the real estate financing process are allowed to charge. This statute has probably spawned almost as much ill will, litigation, and general confusion as the tax laws; every time the regulators try to clarify it (which they did again recently), the requirements seem to become even more blurred. But the attorneys I contacted explained that while a lender could not require you to use an appraisal company or a brokerage firm owned by the lender as a condition of obtaining your loan or eliminating PMI, there probably was nothing wrong with the servicer offering you the option of satisfying the value documentation requirement with a less expensive BPO rather than an appraisal, as long as the servicer did not collect an illegal referral fee or “kickback” from that broker.