How The FHA Is Sinking Mortgage Borrowers

Millions of people have financed and refinanced with FHA mortgages, but what used to be a financial safe-haven is increasingly not-so-attractive. Higher costs and gotcha clauses are making the FHA less unique and more expensive every day.

Don’t believe it? Let’s look at some facts:

Lender Fees

With most forms of mortgage financing lenders have been able to extract such fees as the market would bear — except for FHA loans. HUD rules limited lender fees to 1 percent for most mortgages insured under the program.

All of this changed in November 2008 — two weeks after the presidential election — the outgoing Bush Administration announced that it had decided to “remove the current specific limitations on the amounts mortgagees presently are allowed to charge borrowers directly for originating and closing an FHA loan.”

Translation: A gift to lenders.

FHA Refunds

The FHA was originally established as a “mutual” insurance fund. This means that borrowers — the equivalent of policyholders in a private mutual insurance company — would benefit when the program made a profit. In the case of the FHA, the way this was done was to pay borrowers a refund after their loan was paid off (perhaps when the home was sold).

Unfortunately, the FHA refund program ended with loans originated after December 8, 2004. The government now pockets any profit from the program.

Is this a big deal? You bet. An estimated $9.76 billion in FHA borrower premiums will be added to the FHA’s Mutual Mortgage Insurance in fiscal 2011 — what the government calls a “negative subsidy.” That’s in addition to the $2.65 billion generated in fiscal 2010 and $5.01 billion surplus that’s expected in fiscal 2012.

A “subsidy” is something you put into an account, a “negative subsidy” is — in plain language — something you take out. And where does the money go? As past FHA Commissioner David H. Stevens explains: the “FHA is projected to generate approximately $9.8 billion in receipts for the U.S. Treasury in FY 2011, a significant increase compared to the $565 million of receipts generated in FY 2009.”

Excess Insurance Fees

On April 18, 2011 the FHA’s annual mortgage insurance premium (MIP) for new loans was increased by .25 percent. Doesn’t sound like much, but for most new borrowers the annual cost for FHA insurance will rise from .90 percent to .115 percent or around $30 a month.

That’s $360 extra a year.

So why was the fee increased? There certainly is no financial reason in the sense of insurance program shortages — remember the FHA is shuttling billions of dollars to the Treasury and has never had a taxpayer bailout according to Ron Phipps, president of the National Association of Realtors.

What the fee increase really does is make the FHA mortgage program less attractive to borrowers. That’s good news for private-sector lenders, the very folks who plainly have needed a taxpayer bailout and now worry that the FHA program will be over-utilized.

Of course, private lenders could assure that the FHA program would be less popular by offering better loan products or cheaper ones, a market-based solution that everyone can support.

Exit Fees

Mortgage interest is paid on a per-diem basis, a fair arrangement because for each day money is rented the lender gets compensation. The exception to this concerns the last month of an FHA loan: No matter what day of the month you pay off an FHA mortgage under current rules, the lender gets a full month’s interest.

Here’s an illustration: If you sell your home and closing is on April 5th, you must pay interest for the entire month if the property is financed with an FHA loan. If the total interest cost for the month is $1,000 then you would pay the entire $1,000 — even though you only had use of the money for five days or one-sixth of the month. If you had a conventional loan your cost would be just $166.67.

In other words, in this example the borrower pays $833.33 in excess, unearned interest.

Translation: Another gift to lenders! Multiply by a large number of closings and you have real money.

Sen. Benjamin Cardin (D-MD) and Sen. Johnny Isakson (R-GA) have now proposed an end to this gross overpayment policy. They have introduced a bill — S.488, the Reduce Excessive Interest Payments Act — legislation that would prohibit FHA interest charges on anything but a daily basis, just like all other forms of mortgage lending.

Will this bipartisan bill pass? Not without a fight.

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