On March 9, 2017, the U.S. Court of Appeals for the Third Circuit, in a case construing the Homeowners Protection Act’s (HPA) requirements on the termination of private mortgage insurance (PMI) following a loan modification, held that the termination date remains tied to the original value of the home, and not the value of the home at the time the loan is modified.
The facts on appeal were straightforward. The borrower bought a home in 2007 for $553,330, taking out a loan of $497,950 to help fund the purchase. Because the loan-to-purchase-price ratio was more than 80%, the borrower had to obtain PMI until the ratio reached 78%, which was projected to occur before March 2016. The borrower began struggling to make payments and entered into a loan modification agreement with the servicer in January 2011, reducing the principal balance to $463,737. Pursuant to the loan’s modified amortization schedule, the outstanding principal balance would reach 78% of the home’s original value in July 2014. The servicer, however, informed the borrower that PMI would not be terminated until 2026, a date ten years later than the pre-modification termination date and 12 years later than the recalculated date. The servicer explained the 2026 termination date on the basis that, at the time of the loan modification, it had substituted its broker price opinion (BPO) of $420,000 for the home’s original value. Because the BPO was a much smaller amount than the original home value, the outstanding principal balance would not be paid down to 78% until 2026.
The borrower contended that by relying on the BPO to calculate the PMI termination date, rather than the home’s original value, the servicer violated the HPA. The Third Circuit ruled in favor of the borrower, holding that the HPA requires calculation of the PMI termination based on the home’s original value which, under the HPA, is the lesser of the purchase price or the home’s appraised value at the time of purchase. Because the servicer based the new PMI termination date on the BPO conducted at the time of the loan modification, instead of the home’s original value, the Court found that the servicer violated the HPA.
The Third Circuit’s March 9, 2017 opinion can be viewed here: http://www2.ca3.uscourts.gov/opinarch/163069p.pdf.