Adobe Stock
Lenders have long viewed an 80% LTV — the ratio of the unpaid mortgage balance to the value of the home — as a prudent standard for making mortgage loans. This is why Congress, in establishing Freddie Mac and Fannie Mae, required credit enhancement for any loan where the LTV was originally over 80%. PMI is the most common form of credit enhancement and is typically a monthly expense for borrowers, usually as part of escrow payments.
While this arrangement appropriately reduces default risk for the GSEs and the taxpayers behind them, it becomes unnecessary once a borrower’s current LTV drops below 80%. Borrowers then have significant equity in their homes, which both lowers the chance of a credit loss in the event of a default, and even lowers the likelihood of default in the first place. In such cases, the likelihood of PMI claims being paid is minimal, further underscoring the redundancy of PMI in lower LTV scenarios. During a November 2024 earnings call, Mark Casale, CEO of Essent, a private mortgage insurer, stated that approximately 70% of their current defaults are from policies written in 2021 or earlier which have a current LTV of 61% “so even if they were to go to claim, the probability of us pushing cash out the door is pretty low.” The reality is that the likelihood of loss is based upon current LTV, while many of the existing rules about PMI cancellation are tied to the original, and thus not particularly relevant, LTV.
AVMs offer a reliable and cost-effective way to determine a home’s current value and are already being broadly used. The GSEs already use AVMs for portfolio valuation, loss mitigation and as alternatives to traditional appraisals during loan origination. Commercial banks are also allowed by their regulators to use AVMs. Appropriately so, as research demonstrates that loans originated with AVMs have a 10% lower default risk than those based on traditional appraisals. Despite this, the GSEs have not leveraged AVMs to help borrowers cancel PMI, leaving many homeowners burdened by payments that are no longer necessary.
The Homeowners Protection Act, or HPA, of 1998 establishes cancellation guidelines for PMI but bases them on the “original value” of the property. However, Section 11(b) of the HPA explicitly permits mortgage holders to terminate PMI earlier by mutual agreement. This provides the FHFA with clear regulatory authority to require GSEs to auto cancel PMI based on current — rather than original — property values determined through AVMs.
In a detailed policy paper, we use data on more than 50 million mortgage loans to assess the benefits and costs of automatically cancelling PMI when the AVM-estimated current value of a property yields an LTV of 78% or less. This research estimates that borrowers would have saved $30 to $35 billion over 24 years. By contrast, the GSEs’ recoveries from PMI are reduced by only $1 billion, or an average of just $20 million per year per GSE, a very easily absorbed amount — especially in comparison to borrower savings.
The FHFA should direct the GSEs to require auto cancellation of PMI when a property’s current LTV, as determined by their AVMs, falls to 78% or lower, a level designed to provide a cushion beyond the 80% level. All the GSEs would have to do is perform the calculation and then instruct loan services when to cancel PMI.
This program aligns PMI requirements with existing valuation tools, reducing unnecessary costs for borrowers.
It’s time for the FHFA to act and end unnecessarily long PMI. The FHFA has the authority and the tools to act. Borrowers should not be forced to pay for PMI they no longer need, particularly when AVMs make determining eligibility for auto cancellation of PMI straightforward. By implementing our recommendation, the FHFA can reduce financial burdens on borrowers and ensure a more efficient system for all stakeholders.
