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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