Private mortgage insurance, also known as PMI, is a type of insurance that lenders require borrowers to purchase when they put down less than 20% of the purchase price of a home.
Borrowers are often misled into thinking they can cancel their PMI once their mortgage balance falls below 80% of the original purchase price, but this is not always the case.
What is Mortgage Insurance?
Mortgage insurance was introduced as a way to off-set the additional risk incurred by lenders when allowing a smaller down payment.
A 20% down payment became the baseline for lenders when determining risk of repayment, but this excluded a significant portion of otherwise solid buyers.
Lenders began requiring an additional insurance policy, known as Private Mortgage Insurance, to be paid by the buyer.
Private Mortgage Insurance was created to mitigate the risk of lenders, not to protect the buyer from losing their home.
The risk of lenders increased when they allowed a smaller down payment, and Private Mortgage Insurance was the solution to this problem.
Private Mortgage Insurance is paid by the buyer, not by the lender, which makes it a costly expense for homeowners.
The cost of Private Mortgage Insurance is typically added to the monthly mortgage payment, making it a significant financial burden for many homeowners.
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Mortgage Scam Exposed
Mortgage lenders like Wells Fargo are accused of misrepresenting home values to scam customers. They do this by using a lower home value to calculate the termination date for PMI, extending the date they can collect PMI and increasing payments for homeowners.
Homeowners who entered into mortgage modifications are particularly vulnerable to this scam. They may have paid thousands of dollars in PMI payments unnecessarily. It's essential to review your mortgage documents and termination dates carefully.
A Miami homeowner is taking Wells Fargo to court for allegedly failing to cancel PMI after a modification. She claims the bank continued to charge her PMI payments despite her requests to cancel them.
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How it Works
Here's how mortgage scams work: They often start with a cold call or email from a scammer posing as a lender or a mortgage broker.
Victims are typically low-income homeowners or first-time buyers who are desperate to refinance their homes or secure a mortgage.
Scammers use fake websites, fake company names, and even fake government logos to make their operation look legitimate.
They'll often claim that the victim's loan or mortgage can be modified to lower their monthly payments, but in reality, they're just trying to steal their money.
The scammer will then ask the victim to pay a fee upfront, which can range from a few hundred to several thousand dollars.
In some cases, the scammer may even offer to "lock in" a lower interest rate, which is actually just a way to get the victim to pay more money.
The best way to avoid falling victim to a mortgage scam is to be extremely cautious when dealing with unsolicited calls or emails.
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How Does the Scam Work?
The PMI scam is a complex web of deceit, but it starts with a simple concept: mortgage modification. Many homeowners become victims when they do a mortgage modification, which is different from refinancing a mortgage.
Banks receive a brokers price opinion (BPO) during this process, which consistently shows homeowners still above 80 percent loan value, requiring PMI payments to continue. This is not a coincidence.
A Miami homeowner alleges that Wells Fargo failed to cancel PMI payments after her mortgage modification in 2011. The bank claimed it was still necessary to require PMI payments, despite the modification.
Mortgage Protection Center sends out official-looking letters to homeowners, trying to trick them into buying mortgage protection insurance. These letters can be convincing, especially if you're not paying close attention.
Wells Fargo is accused of misrepresenting to borrowers with modified loans that they are calculating Termination Dates in compliance with HPA. This is a serious accusation, and it's essential to understand the details.
The bank allegedly uses a lower home value to extend the date the bank is permitted to collect PMI, resulting in increased PMI payments and a longer payoff period. This can slow down your equity building and increase your tax liability.
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CFPB Acts Against PHH
The CFPB took a major step in 2014 to combat private mortgage insurance scams by acting against PHH Mortgage, a large mortgage lender. PHH was accused of forcing borrowers to purchase unnecessary mortgage insurance.
In a landmark decision, the CFPB fined PHH $125 million for its actions. This was a significant blow to the company, but it also sent a strong message to the industry about the consequences of engaging in such practices.
The CFPB's actions against PHH highlighted the need for lenders to be transparent and honest with their customers about mortgage insurance requirements. It also led to changes in the way mortgage insurance is sold and marketed to consumers.
As a result of the CFPB's actions, PHH was forced to re-evaluate its business practices and make significant changes to avoid similar penalties in the future.
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