Borrowers in Line for Excess HUD Funds
A pot of gold estimated at between $700 million and $800 million is waiting for families who financed their houses with government-insured Federal Housing Administration insurance. Secretary Andrew Cuomo of the Department of Housing and Urban Development wants to use the money to build affordable rental housing for low- and moderate-income families.
But Rep. Rick Lazio (R-N.Y.) wants to give it back to borrowers.
If Lazio’s name sounds familiar, it’s because he’s going up against Hillary Clinton in this year’s U.S. Senate race to represent New York. He’s also chairman of the House Subcommittee on Housing and Community Opportunity.
The money in question is held in reserve by the FHA’s mutual insurance fund. It represents only a portion of the mortgage insurance premium overpayments paid into the fund by borrowers.
In past years, the agency returned the excess to borrowers in what’s known as “distributive shares.” Exactly how much each borrower received was based on a number of factors. But a borrower who had paid FHA insurance for at least six years would receive a refund as long as the pool of mortgages to which his loan was assigned in any given year was profitable.
However, the government hasn’t paid a distributive share on any mortgage since November 1990.
Back then, there wasn’t any excess. In fact, the FHA’s insurance fund didn’t have nearly enough reserves on hand to cover claims that could have been made had the economy altered and more than the normal number of borrowers failed to make their house payments.
Because the fund was technically insolvent, Congress authorized HUD to waive the rebates so it could rebuild its capital reserves. But lawmakers also gave the department the discretion to begin paying distributive shares again whenever reserves exceeded the level necessary for actuarial safety and soundness.
Fund Found in Good Health
In 1996, an independent audit found the fund to be in excellent financial health. The fund was so flush with cash that President Clinton ordered HUD to cut the up-front insurance premium by 0.25 percentage points for first-time home buyers who successfully completed a counseling program.
But Cuomo has never seen fit to return excess premiums to borrowers who paid them in the first place.
Now the fund is fatter than ever. According to HUD’s figures, it enjoys a capital reserve ratio of 3.81%, nearly double the congressionally mandated 2% ratio. But no distributive shares are being offered.
Under Lazio’s proposal, though, HUD would be required to issue the rebates as long as the fund maintains a capital reserve ratio of at least 3%. And with an estimated 4.06% reserve ratio on the horizon for the 2001 fiscal year, there’s a pile of dough just sitting in HUD vaults waiting to be returned to eligible homeowners.
“Since the mid-1990s, millions of homeowners have been denied their fair share of returns,” says the New York lawmaker.
Indeed, it is estimated that with HUD holding $18.9 billion in capital reserves, nearly 3 million families who took out FHA-insured loans in the late 1980s and in fiscal 1992, 1993 and 1994 could be eligible for shares totaling as much as $800 million. That works out about $266 per borrower.
And it could be more: The mutual mortgage insurance fund is projected to run at a surplus of more than $5 billion during the next five years.
It’s awfully late for an election-year Congress to take action on a new bill. But companion legislation has been introduced in the Senate by Sen. Wayne Allard (R-Colo.), who says, “The FHA should not be making a profit from hard-working families.”
Allard’s bill is co-sponsored by Sen. Phil Gramm (R-Texas), chairman of the Senate Banking Committee, and Lazio. It has the backing of eight of Lazio’s fellow lawmakers, including Rep. Jim Leach (R-Iowa), chairman of the House Banking and Finance Committee, and Marge Roukema (R-N.J.), a senior member of that panel.
The politically powerful National Assn. of Realtors, National Assn. of Home Builders and Mortgage Bankers Assn. also have endorsed the idea.
“We want to ensure the fund is actuarially sound,” says Kit Sumner, president of the mortgage bankers’ group, “but it is only fair that borrowers who overpaid--who contributed to a surplus--should receive rebates.”
The best chance for passage at this stage is as a rider to another measure. Lawmakers, now in recess, return after Labor Day and stay in session for one month before adjourning until 2001.
Even if Congress fails to force HUD’s hand on distributive shares, though, FHA borrowers are due a premium refund if they terminate their mortgages any time through the end of their loan’s seventh year.
That’s because they paid their entire mortgage insurance premium at closing, either in cash or by financing it as part of the loan amount. But the government doesn’t earn the whole premium until the mortgage is on the books for at least 84 months.
Refunds Smaller on Older Loans
Unlike distributive shares, which would be larger for older loans, premium refunds become smaller as the loan ages. In other words, the longer you hold the loan, the less you’ll get back.
But if you sell the house and pay off your FHA loan or trade in an old FHA loan for a new mortgage within 83 months, you should receive some kind of rebate for the unearned premium.
You won’t get a refund if your loan is assumed by another borrower or if the lender has made a claim for insurance benefits because you didn’t make your payments. Also, if you refinanced into another FHA loan, you might have used the unearned premium from the first loan to pay part of the premium on the new one.
Otherwise, if you voluntarily terminate the loan, you are due a refund. If the loan is less than a year old, you’ll get back at least 90% of the premium. If it’s less than two years old, you’ll get back 80%. Less than three years, you’ll get back 70%. And so on.
All this is supposed to work automatically. The lender notifies the FHA that your loan has been closed, and within a few weeks the government sends you an application form (HUD-27050-B) for a refund. No fuss, no muss.
Unfortunately, the process doesn’t always go smoothly. In fact, at last count, HUD has been unable to locate 70,000 of the borrowers to whom premium refunds or distributive shares are due. Together, these lost souls are owed some $10 million--on average about $700 each.
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Lew Sichelman is a syndicated real estate columnist. He can be contacted via e-mail at LSichelman@aol.com. Distributed by United Feature Syndicate.
