Why Haven’t Loan Officers Been Told These Facts?

Borrower Requested PMI Cancellation, Be Circumspect with Oral Disclosure

Last week, the Journal brought to light a common misrepresentation in PMI cancellation. Mortgage Loan Originators (MLO) tend to conflate the Home Owner Protection Act (HPA) PMI cancellation provision with the investor PMI cancellation procedures. And yet, the investor cancellation provisions, (sometimes called non-HPA or Borrower requested cancellation using current value), are possibly more confusing than the HPA. Because of investor PMI cancellation complexities and the very granular application of HPA, it is easy for MLOs to distort the facts surrounding PMI cancellation. As a result, applicants may misunderstand the financing terms due to the ever-present MLO assertion that the PMI is cancellable when the loan balance reaches an 80% loan to value (LTV).

PMI is a substantive finance charge. Accordingly, misrepresentations regarding PMI cancellation may rise to the level of a deceptive and unfair act such as those prohibited practices enumerated under Title X (UDAAP) of the Dodd-Frank Wall Street Reform and Consumer Protection Act. In addition, such misrepresentations may also violate the prohibitions found in the Mortgage Acts and Practices Act (Regulation N).

This week, we shall evaluate FHLMC and FNMA policies regarding PMI cancellation. The policies are not simple for borrowers requesting PMI cancellation using the property’s current value apart from the HPA. Would you please think again before telling borrowers that the GSE’s cancel borrower-paid PMI at the 80% LTV?

For automatic and Borrower requested PMI cancellation, the Borrower must be current with payments as of the anticipated termination date. Otherwise, the servicer is not required to terminate PMI until after the Borrower brings payments to date. The “current payment” or “good payment history” proviso includes instances of forbearance. Thus, a loan in forbearance would not fall under the rubric of good payment history and would constitute a late payment for the one or two-year clean record timing requirements. However, there are special considerations for mortgagors impacted by COVID. The Journal will unpack the COVID exceptions next week.


Borrower-Initiated Termination of Conventional Mortgage Insurance Based on Current Value of the Property

Loans secured by a one-unit principal residence or second home.

Satisfaction that the mortgage loan meets the applicable LTV ratio eligibility criterion must be evidenced by obtaining a property valuation based on an inspection of both the interior and exterior of the property. Cancellation LTV’s must be:

  • 75% or less if the seasoning of the mortgage loan is between two and five years.
  • 80% or less if the seasoning of the mortgage loan is greater than five years.

(Loans Not Subject to HPA) For loans secured by a one to four-unit investment property or a two to four-unit principal residence, the LTV must be:

  • The LTV ratio must be 70% or less, and the mortgage loan seasoning must be greater than two years.

If Fannie Mae’s minimum two-year seasoning requirement is waived because the property improvements made by the Borrower increased the property value, the LTV ratio must be 80% or less.

The Borrower must provide details to the servicer on the property improvements since the mortgage loan’s origination. Improvements that increase value are typically renovations that substantially improve marketability and extend the useful life of the property (e.g., kitchen and bathroom renovations or the addition of square footage). However, repairs that are made to keep the property maintained and fully functional are not considered improvements.

For Borrower Requested Cancellation, Verify the Borrower has an acceptable payment record

An acceptable payment record is achieved when the mortgage loan:

  • Is current when the termination is requested, which means the mortgage loan payment for the month preceding the date of the termination request was paid.
  • Has no payment 30 or more days past due in the last 12 months.
  • Has no payment 60 or more days past due in the last 24 months.


Borrower-requested cancellation of Borrower-paid mortgage insurance based on the current value
PMI cancellation based on current value:

Based on the Mortgage’s current balance and the current value, the LTV ratio must be:

  • 75% or less if the seasoning of the mortgage loan is between two and five years.
  • 80% or less if the seasoning of the mortgage loan is greater than five years.

(Loans Not Subject to HPA) For loans secured by a one to four-unit investment property or a two to four-unit principal residence, the LTV must be:

65% or less, with either:

  • At least two years have elapsed since the Origination Date of the Mortgage
  • No required minimum period having elapsed since the Origination Date of the Mortgage if substantial improvements to the Mortgaged Premises have increased the market value of the Mortgaged Premises since the Origination Date

The Mortgage must be current:

  • There was no payment 30 days or more past due in the preceding 12 months (or since the Origination Date if the Mortgage was originated in the past 12 months)


  • There was no payment 60 days or more past due in the preceding 24 months (or since the Origination Date if the Mortgage was originated in the past 24 months)

A few more conditions:

  • No defaults (non-compliance with the covenants) in the 12 months preceding the cancellation request or achieving the requisite LTV
  • Any defaults under the terms of the Security Instrument may include but are not limited to:
    • The Borrower’s failure to pay taxes, ground rents, assessments, and other charges requiring payment under the Security Instrument
    • The Borrower’s failure to maintain the Mortgaged Premises in accordance with the Security Instrument

Next week the Journal will wrap the short series on PMI cancellation with a look at special exceptions for mortgagors impacted by COVID.

Behind the Scenes

The Taper Tantrum
Watch Those Refinances, No On and Off Switch for Rate Changes

Okay, so the refinances will begin to dry up like the Colorado River when the rates increase. The refinances could end suddenly or dwindle over time. As the sun rises in the east, this refinance market is coming to a close. Some originators might say, “No worries, my business is purchase money. I’m bulletproof like a Superman.” Hold up there MLO of Steel – Market contractions are like Kryptonite.

Picture this, ten hungry mice eating from a 48″ cheese wheel. That’s been our current refinance market. Now, hold onto that thought.

FreddieMac, in its latest forecast, is anticipating 3.50% on the 30 fixed-rate loans by the end of 2022. This rise in rates will have no minor effects on total originations. From FHLMC – “With a higher mortgage rate forecast for 2022, we anticipate refinancing activity to soften, with refinancing originations declining from $2.6 trillion in 2021 to just below $1.0 trillion in 2022. Overall, we forecast that total originations will decline from $4.5 trillion in 2021 to $3.1 trillion in 2022” (FNMAs forecast is slightly more optimistic).

If math is not your strong suit, let’s further quantify those numbers. Refinance volume shall decline to 38% of the 2021 volume. Total loan volume shall decline to 69% of 2021 total volume, give or take a few billion. You could say, “No worries, if I make 69% of my 2021 income. I’m still getting rich.” Unfortunately, that is not quite how it works. Read on.

Now, back to the picture of the cheese wheel. Ten hungry mice now must share a 33-inch cheese wheel, down from the 48-inch version. Some mice will do anything to fill their gut! A few mice will cut margins on reduced volume to increase volume. How does that even work? Probably a less than brilliant plan. Back to B-School for that mouse! Other mice will encourage the MLOs to work for lower compensation! Hmmmmm, not cool. That approach is one of our least favorites.

Keep vigilant for the signs your business could be tanking. Here are a few indicators that you might be heading down the wrong path. First, like a zombie bite, keep an eye on what you read. Second, at all costs, avoid that dreadful mid-career read (it’s okay for entry-level folks), “What Color is Your Parachute!” If you’re reading that monstrosity, your parachute is already black and blue with a frowny emoticon.

Another warning sign. The grass looks greener anywhere but where you are standing. If you hit these junctures, you may have already missed significant opportunities.

Understand that for mice to hold onto profitability on shrinking volume, the bigger mice must take cheese from the smaller mice. Now the big mice can take away the cheese from the smaller mice with some ease. Watch out for this coming market. For many, before reading the awful Parachute tome, comes another book that may spell doom. “Who Moved My Cheese.” Don’t reach for that dreadful tripe! Please do not associate the cheese wheel metaphor with that horror, “Who Moved My Cheese.” If you start reading it, it could be too late for you. So please don’t read that thing. It’s like Pinocchio on acid.

Instead, read something that works. If you’ve not read the seminal work by W. Chan Kim and Renee Mauborgne, “Blue Ocean Strategy,” now is an excellent time to do so. Most originators are already in a “Red Ocean.” But, unfortunately, that Red Ocean is about to get a lot redder. The Red Ocean symbolizes cut-throat competition typified by shrinking margins in well-developed markets.

Next week, the Journal shall endeavor to apply the Blue Ocean Strategy to the current mortgage market.


Tip of the Week

​​Project Management Skills for Loan Origination
Monitor Communications

To a Mouse (yes, the Journal got stuck on the Mouse)
Robert Burns

The famous poem by the poet Robert Burns is indecipherable to most of us in the original Scottish dialect. Ask yourself, do you sound like Robert Burns to your stakeholders?

But Mousie, thou art no thy-lane,
In proving foresight may be vain:
The best laid schemes o’ Mice an’ Men
Gang aft agley,
An’ lea’e us nought but grief an’ pain,
For promis’d joy!


But little Mouse, you are not alone,
In proving foresight may be vain:
The best-laid schemes of mice and men Go often awry,
And leave us nothing but grief and pain, For promised joy!

You must monitor your communications to ensure your communications have the intended effect, which will lead to better stakeholder engagement.

Communications experts describe various encryption modes when messaging another person or persons. These are visual, linguistic, spatial, aural, and gestural modes. Most folks have heard of “body language.” Visual, linguistic, spatial, aural, and gestural modes are elements of face-to-face communication, including body language.

Communications consist of much more than just words or text used to convey the message. The structure, frequency, and mode support or detract from the message.

A few communication tips. The message receiver is more likely to understand the message as intended with interactive communications. Simultaneously employing two or more communication modes is more likely to be understood as the message is intended.

Email and texting are the worst ways to close communication gaps. But frequently, that is what we have with many stakeholders. So with key stakeholders, monitor this form of communication closely.

Two pointers for written communications:

  1. Keep the bottom line on top. The subject line or top line must provide the action item, request, status, or demand. If there is no apparent relevance to the reader, that becomes part of the message – irrelevance. The bottom line on top exists primarily to address the most relevant receiver question. Why are you sending me this email? If that is not plain in the first line, your message is at risk.
  2. Go short. Generally, you are better off with a single focus. However, suppose you need to communicate multiple messages to the receiver. In that case, you might consider another communication mode such as video conferencing. Alternatively, send separate emails for each discrete subject. The more complex the messages, the better it is to get closer to the receiver, e.g., telephone or face-to-face.

The more important the communication is to the loan manufacture, the “closer” you want to get to the message recipient. Therefore, if we are going to consistently and successfully close the communication gap, you must focus on the communications of most significant importance. That is why proper stakeholder identification and assessment are crucial.

You only have so much time available for the most effective multi-modal communications (e.g., face-to-face, video, telephone). MLOs must ensure they are communicating the right messages to the right stakeholders at the right time. There are well-understood instances that lead to communication gaps. Carefully monitor single-mode communications with key stakeholders. Especially when using mail, email, or dashboards.

How can you tell when communication is not working to plan? You can ask. That is always a good thing to do.

There are also signals that your communications are unsuccessful. For instance, key stakeholders may call late at night or on Sunday. Any sense of urgency they express is a good sign that you need to adjust the plan. That is unless you wanted to create a sense of urgency!

Another indicator is the preponderance of “why” questions. “CJ, why am I finding out about this today!” You get the picture.

Better communications are more likely with interactive multi-modal communications.

Face-to-face is numero uno. Unfortunately, the jury is still out on video conferencing. In my unscientific studies, I’ve concluded that while video conferencing may not precisely mimic face-to-face, it’s much closer and more effective than the telephone.

More on communications next week.


2021 CE – Sneak Preview

Is now a good time to go long or short on the stock market? Is the residential real estate market overbought? Time to sell? Are you confused about where to invest your hard-earned money? Stop messing around and make the best investment you will ever make – invest in yourself. Yes, that means professional development. Be the best version of yourself that you can be. Expand your horizons. Why not get on one or more of the developing market waves?

Are you interested in Low-Moderate-Household-Income lending? Do you wonder about getting started with loan manufacture requiring alternative credit (nontraditional credit)? Have you heard all the horror stories about collaborations with Housing Finance agencies? Grab the bull by the horns and take some chances. Join us for a primer on getting started with these types of loan programs.

CE should be an opportunity for professional development. That you might expect – but we promise that you will have fun at the same time. So how can you enjoy hours and hours of law, ethics, and regulation? Well, swing on by the LoanOfficerSchool.com 2021 continuing education classes and find out!