PMI deadline set by original price, not post-HAMP modification appraisal

By Richard A. Roth, J.D.

The automatic termination date of a homeowner’s private mortgage insurance was to be calculated based on the original purchase price of his home, not on the home’s appraised value after the loan was modified under the Home Affordable Modification Program, according to a U.S. District Judge for the Northern District of West Virginia. However, while the mortgage loan servicer had violated the Homeowners Protection Act, its attempts to collect PMI premiums after the correct termination date did not violate the West Virginia Consumer Credit and Protection Act (Rice v. Green Tree Servicing, LLC).

The homeowner bought his home in 2006, borrowing $355,550 against a purchase price of $395,000. Due to the high loan-to-value ratio, he was required to supply private mortgage insurance. The PMI automatic termination date was determined at the time to be Jan. 1, 2016.

A HAMP modification took effect Sept. 1, 2010. The loan was changed from a fixed-rate loan to a step-rate loan, and the principal balance was fixed at $340,123.01.

Loan servicing duties were transferred to Green Tree Servicing on June 1, 2013. Green Tree inferred that a valuation carried out at the time of the HAMP modification produced a value of $237,603, although much of the related documentation could no longer be found. Believing that Fannie Mae servicing guidelines required that appraisal documentation be available, Green Tree obtained a new valuation, which said the home was worth $322,700 in 2013.

Termination date calculation. Under the HPA, a homeowner’s obligation to supply PMI terminates automatically on the date an amortization schedule projects the loan balance should drop to 78 percent of the home’s initial value, assuming the homeowner has made all of the required payments (see 12 U.S.C. §4902(b)). When the homeowner asked to be told his termination date, Green Tree prepared an amortization schedule based on the 2010 loan modification and the 2013 valuation. This yielded an automatic termination date of Feb. 1, 2020.

The homeowner disagreed with that calculation method. He believed that the automatic termination date should have been calculated using an amortization schedule based on the modified loan but the initial purchase price. That yielded a termination date of March 1, 2014, which would save him nearly six years’ worth of PMI premiums.

Fixed rate v. adjustable rate. The judge’s first task was to decide what type of loan was involved. The HPA contemplated two alternatives—a fixed-rate loan and an adjustable-rate loan. The difference was important because the PMI termination date for a fixed-rate loan was to be set based on an amortization schedule created at closing, while the termination date for an adjustable-rate loan was to be set based on “an amortization schedule then in effect.”

The judge agreed with the homeowner that a step-rate loan—a loan with prescheduled interest rate changes—was an adjustable rate loan, even though the dates and amounts of the changes were fixed. Under the HPA, a fixed-rate loan “has an interest rate that is not subject to change,” she said. Since the rate was to change, the loan could not be a fixed-rate loan. An adjustable-rate loan, on the other hand, was a loan “that has an interest rate that is subject to change.”

“Original value.” In order to calculate the automatic termination date, one divides the principal balance of the loan by the “original value of the property securing the loan.” The automatic termination date is the date on which the appropriate amortization schedule says the resulting ratio will drop to 78 percent (see 12 U.S.C. §4901(18)).

But, what was the “original value of the property”? The homeowner argued that the original value was the purchase price, while Green Tree argued that it was the 2013 value set by the valuation required by Fannie Mae’s servicing guidelines.

If the HAMP modification changed terms or conditions of the loan, the HPA says the PMI termination date must be recalculated to reflect the modified terms, the judge said. In this case, the HAMP modification changed some loan terms, but it did not mention the value of the property.

According to the judge, the HPA’s language supported the homeowner’s claim that the original value of the property was not a term or condition of the loan that was changed by the HAMP modification. The act defines “original value” as the lesser of the property’s purchase price or the appraised value, she said, and that amount was $395,000. Moreover, while the HPA provides a different definition in the case of a refinancing, the modification was not a refinancing.

However, the amortization schedule prepared by Green Tree in 2013 was “the amortization schedule then in effect” that was to be used to determine the loan balance, the judge added. It was the most recent schedule and the best that was available under the circumstances.

The modification agreement did not explicitly address changing the original value, and the homeowner never agreed to such a change, the judge decided. She rejected Green Tree’s argument that the termination date was to reset based on the terms and conditions of the modified loan. Rather, the HPA said that the termination date is to be rest to reflect the modified terms and conditions. The original value had not been modified by the HAMP modification and thus remained at $395,000, the amount fixed at the initial loan closing.

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