This is a new one, Suddenly you have pay PMI

(image source: http://thewrittenblog.com)

This was something I dug up just today. It's a complaint from a customer of the USAA loan servicing company. Essentially, this is what happened. The customer acquires a loan that is serviced by USAA, and then they apply for a HELOC on top of that. They did this last year. Recently the bank reassessed their house and froze their HELOC. This is actually really common, and it's something the banks are doing now to minimize their risk as many of the HELOC's default.

The second part of this story was the strange and sinister part of it. The couple had enough equity in their house to not pay PMI. For those that don't know, Private Mortgage Insurance (PMI) is an extra fee you typically have to pay on your mortgage if your LTV (loan to value) is > 80%. It protects the bank in case you default. (it doesn't do anything for you) When the bank re-assessed their house to freeze the HELOC, they also started requiring that this couple begin paying PMI on their mortgage.

Now, personally I'm all in favor of banks freezing HELOCs. Preventing people from submerging themselves more in debt is a good thing, and I have no sympathy for those stories of people who planned to pay their damn mortgage with their HELOC. This is just dragging out a problem that needs to resolve itself faster so a healthy market can emerge.

That being said, IMHO, a lender suddenly adding PMI when it wasn't required before should be illegal. I know it's probably a line somewhere on page 231 of the loan documents that the buyer signed, but you shouldn't just arbitrarily be able to add a fee to a perfectly fine performing loan. If the initial agreement was that the LTV was fine and a PMI was not required, you should only be able to add an extra fee on a refinance. The lender should just be happy that they get their payment every month.... especially in today's market.

What're your thoughts?