Timing is everything in settling FHA loan
WASHINGTON — Could the federal government's booming FHA mortgage program be forcing homeowners to pay tens of millions of dollars of extra interest charges when they sell their houses or refinance their loans?
Critics say yes. The government says the critics aren't providing the full picture.
Those critics include Sen. Ben Cardin, D-Md., who is sponsoring legislation that would prohibit FHA lenders from collecting a full month's worth of interest from sellers and refinancers who pay off their mortgages — go to settlement — before the final day of the month.
No other major source of financing — not Fannie Mae, Freddie Mac or even the VA — requires interest payments from borrowers beyond the date they pay off their loans. On an FHA loan, however, if you sell your house and go to closing early in the month, you are charged interest through the rest of the month.
Say you pay off a $200,000 FHA-insured mortgage on the fifth day of April. You'll be charged an extra $820 to cover interest for the remaining days of the month, according to estimates prepared by the National Association of Realtors, which supports Cardin's bill. If you pay off the same loan on April 15, the additional interest levy would total $492.
Where does the money go? Ted Tozer, president of the Government National Mortgage Association, which bundles FHA loans into bonds and sells them to investors, says it flows to the bondholders, who are guaranteed payment of interest for the full month even if the balance is paid off much earlier.
Tozer maintains that the direct payment approach has afforded FHA borrowers a slight discount — 0.10 percent to 0.15 percent — on their initial interest rates. But critics charge that the extra interest greatly exceeds that barely perceptible rate break.
"This is an issue of fairness," says Cardin. "Homeowners should not have to pay interest on loans that they have fully repaid." His bill, the Reduce Excessive Payments Act, would prohibit the practice and require FHA lenders to compute payoffs on a per-diem basis rather than a full-month basis.
The National Association of Realtors says the out-of-pocket costs to unwary consumers are huge. Citing the most recent statistics on early payoffs it claims it could obtain from FHA, the group says that during 2003 alone:
• FHA borrowers paid $587.4 million in "excess interest fees" because of the full-month rule.
• Only 16 percent of loans were prepaid during the final five days of the month.
• The average "excess interest" payment from borrowers to lenders and investors was $528, but 425,000 homeowners paid an average $622 in extra fees.
Between January 2000 and January 2004, according to the Realtors' analysis of FHA data, borrowers paid more than $1.375 billion in excessive interest. The corresponding amounts today could be significantly higher since FHA has a much larger market share.
Asked for comment, Vicki Bott, who heads FHA's single-family mortgage office, acknowledged the controversy and said the agency is "examining this issue very closely."
In an interview, Tozer said the entire issue is up to FHA, and that his agency could readily sell its mortgage-backed bonds using the per-diem payoff approach that is standard in the conventional mortgage marketplace. But investors would still need to be compensated for the full month's worth of interest, he said, and that would probably require a slightly higher rate on the mortgage.
Where's this headed? With pressure coming from Congress — notably from an influential Democrat who tends to be supportive of the Obama administration's policies — FHA may move off its disputed practice.
In the meantime: If you have an FHA loan and plan to refinance or sell your house, try hard to schedule the closing at the end of the month. You could save a bundle.
Kenneth R. Harney can be reached at email@example.com.