Refunds to borrowers who pay off their federally insured mortgages have been eliminated, a move that was approved by Congress in last year's omnibus appropriations legislation.

The change will work a particular hardship on borrowers who expect to trade in their government loans for less expensive conventional mortgages after they improve their credit standing.

"It's not that they counted on getting a refund, but people who used FHA financing to get their foot in the door always knew they would get something back," said Tim Doyle, director of government affairs at the Mortgage Bankers Association.

"It was one of the advantages of the program," Doyle said.

The Federal Housing Administration, which insures lenders against losses to borrowers whose credit issues prevent them from obtaining the lowest interest rates, has been cutting back on refunding a portion of the insurance premium borrowers pay at closing for several years.

FHA borrowers pay an upfront fee of 1.5 percent of the loan amount as well as a monthly premium.

At one time, the agency returned the unused premium when a borrower paid off the mortgage within seven years. Then, a few years ago, the agency shifted to a five-year schedule.

Now, for all FHA mortgages issued on or after Dec. 8, there will be no refund unless the borrower refinances to another government-insured loan.

The agency also has modified its rebate schedule for refinancers to a three-year time period, another step being questioned by the housing lobby.

"In that the upfront fee covered the years of highest risk, which are the third through the fifth year, the five-year schedule made sense," said Doyle. "But not three years, especially when you consider that the insurance fund is fully capitalized and in excellent health."

The provision allowing the FHA to cut refunds was inserted into the funding bill at the last minute while the measure was being considered by a conference committee.

It was not included in either the House or Senate-passed bills, and lobbyists didn't know about it until the FHA, a division of the Department of Housing and Urban Development, issued new rules earlier this month.

"It was a sneak attack to take money from HUD to pay for something else," said a lobbyist close to the situation who asked that his name not be used. "Even Members of Congress didn't know about it."

The MBA, along with the National Association of Realtors and the National Association of Home Builders, are now working together in an effort to persuade lawmakers to restore the refund.

"From our perspective, it's unfortunate for the program," said the MBA's Doyle, whose members originate the lion's share of government-backed mortgages. "There's already a perception out there that the FHA costs more than other products, and this adds to that cost."

Doyle said his group also is considering asking the FHA to lower the upfront premium for all borrowers.

"The question is," he said, "because there are no longer any refunds, does the FHA still need to capture the additional revenue, especially since the fund has more than twice the capital on hand than is mandated by Congress."

Published: January 26, 2005

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When Lew Sichelman first started writing about housing in 1969, he was the youngest real estate writer in the country. Now, 37 years later, he's one of the oldest -- and most decorated. He has been rated the top housing columnist in the country by the National Association of Realtors as well as by his peers in the National Association of Real Estate Editors. Indeed, NAREE has recognized his work on numerous occasions. One year - due to his advancing age, he can't recall which one - he earned top honors in the annual NAREE Journalism Contest in three out of the four major writing categories. It was the first time one writer has won so many NAREE awards in a single year. Known for his ability to make even the most difficult topics understandable, Sichelman also has been honored by the National Association of Home Builders and the Mortgage Bankers Association. He began providing in-depth coverage of and consumer-oriented information about housing and housing finance at the Washington Daily News, where he was real estate editor. He held that same position for nine more years at the Washington Star, which purchased the News in 1972. The Star, a so-called "writer's newspaper" which also had the misfortune of being an evening paper, was put out of its misery in 1981, and Sichelman, who had begun self-syndicating his column in 1978, decided to become a full-time columnist. Today, his column, "The Housing Scene," is distributed by United Media to newspapers throughout the country. He also is on the staff of National Mortgage News, an independent newspaper which is considered the bible of the mortgage business. And he writes for numerous other publications, including MarketWatch.com, where he answers readers questions once a week, Sports Illustrated (don't ask), RealtyTimes.com, BigBuilder and others. Sichelman is married, the father of five and grandfather of eleven.