End of controversial FHA earnings rule

WASHINGTON – Can you be charged interest on your mortgage even after you’ve paid it off completely? Can the meter keep running when you don’t owe the bank – your main balance is zero?

Surprise! Much to the chagrin of many home sellers and refinancers, the answer has been yes for years. If your loan was Federal Housing Administration insured and you paid it back before maturity, at closing you would have to pay a full month’s interest, regardless of what day of the month you actually paid.

Even if you closed on March 2, for example, your loan officer will charge you interest until March 31, which could add hundreds of dollars to your transaction fees. The practice of FHA is unique among the major players in the housing finance market. Fannie Mae, Freddie Mac, and the Department of Veterans Affairs all require that interest be charged only until the day the principal is repaid. After that, the counter stops.

But change is on the horizon. Through a regulatory mandate from the Consumer Financial Protection Bureau, the FHA agreed to end its controversial full month interest policy, but only for prospective borrowers. The FHA has until Jan. 21 to make the change, so sellers and refinancers who currently have FHA-insured mortgages are excluded from the deal. Many will still be affected by additional interest charges.

Here’s a quick look at what’s behind the agency’s late withdrawal. Over the past decade, homeowners and brokers have complained that the FHA’s interest payment policy amounts to a scam. Not only were many salespeople ignoring the odd FHA requirement, they failed to factor the additional costs into their financial plans.

Assn. of Realtors, who began to publicly criticize the practice in 2004, said that by insisting on full months of interest payments, the FHA had effectively made sellers pay tens of millions of dollars in unjustifiable additional fees. In just one year, 2003, according to the association, FHA borrowers paid about $ 587.4 million in “excess interest charges.”

In 2011, voter complaints prompted Senator Ben Cardin (D-Md.) To introduce legislation that would have banned full-month interest charges and required FHA loan departments to calculate payments on a daily basis.

Cardin’s bill ultimately went nowhere. The FHA brushed aside its criticisms, saying that by guaranteeing bond investors a full month’s interest on mortgages, its interest rates were slightly lower than those of its competitors. A mortgage industry estimate put the rate break at around 0.10% to 0.15%.

Experts in the real estate industry, however, said that the real beneficiaries of this long-standing practice were loan managers, who could earn interest on the “float” – the money they collected from borrowers and from which they paid. had free until the end of the month, when they had to make the final interest payments to bond investors.

But the financial system overhaul legislation passed by Congress in 2010 – the Dodd-Frank Wall Street Reform and Consumer Protection Act – got in the way. The law empowered the new consumer office. drafting regulations prohibiting prepayment penalties. Under the rule adopted by the bureau, the FHA’s full month interest policy amounted to such a penalty – essentially a fine for borrowers who couldn’t or didn’t pay at the end of the month. Since home buyers rather than sellers typically schedule closing dates, many sellers have not been able to control the exact repayment date of their FHA loans, resulting in hefty interest penalties as per definition. of the consumer office.

Tucked away in a Federal Register notice announcing its intention to change the policy, the FHA has finally clarified whether the tiny interest reduction borrowers received was ever worth the additional interest amounts they could face if they paid off the loan. advance loan. New borrowers next year “can expect to pay a slightly higher rate,” the agency said, “but they would also fully benefit from lower interest charges. [at closing] when they prepay … in most cases that more than offsets the cost of the higher rate.

Ah! So in fact, under the old practice, FHA clients were paying more than they should have. And it can be assumed that some of the 7.8 million existing FHA mortgage borrowers who are not covered by the next policy change will continue to be vulnerable to paying more than they should.

The only solution: If you’re a seller or a refinancer paying off an FHA loan, insist that your close be at the end of the month, not at the beginning.

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Distributed by the Washington Post Writers Group.

About Ethel Nester

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