Q: What are the exceptions to cancellation and termination provisions for high risk residential mortgage transactions?
A: The borrower-requested cancellation at 80 percent LTV and the automatic termination at 78 percent LTV requirements of the Act do not apply to “high risk” loans. However, high-risk loans are subject to final termination and are divided into two categories -conforming (Fannie Mae/Freddie Mac-defined high risk loans) and non-conforming (lender-defined high risk loans) (12 USC §4902(g)(1)).
Conforming Loans (Fannie Mae/Freddie Mac-Defined High Risk Loans)
Conforming loans are those loans with an original principal balance not exceeding Freddie Mac’s and Fannie Mae’s conforming loan limits.9 Fannie Mae and Freddie Mac are authorized under the Act to establish a category of residential mortgage transactions that are not subject to the Act’s requirements for borrower-requested cancellation or automatic termination, because of the high risk associated with them.10 They are however, subject to the final termination provision of the Act. As such, PMI on a conforming high risk loan must be terminated by the first day of the month following the date that is the midpoint of the loan’s initial amortization schedule (in the case of a fixed rate loan) or amortization schedule then in effect (in the case of an adjustable rate loan) if, on that date, the borrower is current on the loan (12 USC § 4902(g)). (If the borrower is not current on that date, PMI should be terminated when the borrower does become current.)
Non-Conforming Loans (Lender-Defined High Risk Loans)
Non-conforming loans are those residential mortgage transactions that have an original principal balance exceeding Freddie Mac’s and Fannie Mae’s conforming loan limits. Lender-defined high-risk loans are not subject to the Act’s requirements for borrower-requested cancellation or automatic termination. However, if a residential mortgage transaction is a lender-defined high risk loan, PMI must be terminated on the date on which the principal balance of the mortgage, based solely on the initial amortization schedule (in the case of a fixed rate loan) or the amortization schedule then in effect (in the case of an adjustable rate loan) for that mortgage and irrespective of the outstanding balance for that mortgage on that date, is first scheduled to reach 77 percent of the original value of the property securing the loan.
Like conforming loans that are determined to be high risk by Freddie Mac and Fannie Mae, a residential mortgage transaction that is a lender-defined high-risk loan is subject to the final termination provision of the Act.