> Advice For Borrowers
"Excess Interest Payments" By FHA Borrowers Stoking A Legislative Fight On Capitol Hill
by Kenneth R. Harney
A legislative fight is brewing on Capitol Hill over an issue that dates back 34 years: The requirement that homeowners who prepay their FHA (Federal Housing Administration) mortgages be charged interest through the full month of the payoff. FHA homeowners who pay off their mortgages on any day other than the first of the month are charged interest through the end of that month, even though their debt has legally expired. That policy -- in place since 1970 -- was imposed not by FHA itself, but by the Government National Mortgage Association ("Ginnie Mae"), which packages most FHA loans into bonds for sale to investors. The investors, say Ginnie Mae officials, buy the bonds with the explicit understanding that they will receive full-month interest on all home loans supporting the bonds. Buyers of competing securities, such as Fannie Mae and Freddie Mac mortgage-backed bonds, also receive full-month interest payments on all loans. But Fannie and Freddie generally provide the additional interest out of the fees they collect for creating and guaranteeing the mortgage-backed securities. FHA borrowers over the years have attempted to minimize extra interest charges by arranging to pay off their loans during the final few days of the month or on the first of the month. The Mortgage Bankers Association of America estimates that 70 percent of all FHA loans "prepay on the last five business days of the month and the first business day of the following month." The National Association of Realtors says that is incorrect, and that fully 40 percent of FHA borrowers pay off loans during the first 10 days of the month -- thereby exposing themselves to as many as 3 weeks worth of extra interest charges. The total cost to consumers is unacceptably high, argues NAR's John W. Anderson, past chairman of the association's Federal Housing Policy Committee. During 2003, he says, 55 percent of FHA borrowers paid an average of $528 in excess interest fees, with an aggregate cost of more than $587 million. Ginnie Mae's policy "unfairly penalizes the American consumer," and harms moderate-income families who are refinancing or buying a new home. The NAR is pushing for Congress to mandate an end to the full-month policy, and has stirred up interest in key committees of both the House and Senate. Ginnie Mae's vice president for capital markets, Michael Frenz, argues that the inevitable consequence of relieving borrowers of the full-month interest payment requirement will be higher interest rates for all FHA borrowers. "The investor is going to have to be paid" by somebody, said Frenz. If not the borrower, then who will pay? Ginnie Mae has neither the statutory authority nor the budget resources to do so, but could be given authority and appropriations by Congress. Mortgage servicers who administer the loans for investors could also be asked to pay, Frenz says. But they would need to get that money from somewhere, and would almost certainly raise interest rates on FHA applicants across the board. How much of an increase? The Mortgage Bankers Association of America estimates the rate increase would need to be between 1/8th of a percent and 1/4 of a percent. That extra cost would make FHA loans more expensive -- and less affordable -- for the first-time buyers who make up the bulk of the market. NAR's Anderson doubts the rate increase would be significant, and would eventually disappear because of competitive market forces. Where is all this headed? Look for a legislative effort in the near future, say Capitol Hill real estate and mortgage experts. In the meantime, Realtors, lenders and others advising FHA clients should put the message out loud and clear: If you plan to refinance or otherwise prepay your FHA loan, take special care with the timing of your closing. | 
