FHA Mortgage Penalty Draws Flak --- Low-Income Borrowers Pay Extra Upon Prepayment, Realtors Group Complains

25 March 2004
The Wall Street Journal
By James R. Hagerty

While the Bush administration touts its efforts to help more people afford their own homes, it has quietly reaffirmed a policy that costs low-income home buyers hundreds of millions of dollars in extra interest payments each year.

These extra interest costs often total more than $500 per borrower, a significant sum for people who qualify for FHA loans, the realtors say. "That's money they could use to make their next [home] purchase," says John W. Anderson, a real-estate broker in Crystal, Minn., who is a member of the association's federal housing policy committee. Instead, the interest payments go to investors in securities backed by FHA loans. Those securities are guaranteed by Ginnie Mae, an arm of the Department of Housing and Urban Development, or HUD.

Last year, Ginnie Mae agreed to review the policy after Mr. Anderson raised the question in a meeting with HUD officials. Ginnie Mae consulted with both the realtors association and the Mortgage Bankers Association in examining the policy. In February, without making any public announcement, Ginnie Mae told the realtors association that it had decided to stick with its policy.

"We realize that this looks like a consumer-unfriendly policy," said Michael J. Frenz, a vice president at Ginnie Mae. But, he said, "investors [in Ginnie Mae securities] expect to receive this interest through the end of the month, so clearly someone has to pay it." If borrowers didn't pay these costs, Mr. Frenz said, interest rates or fees on FHA-insured loans would rise to make up the difference, and users of such loans would be worse off than at present. The Mortgage Bankers Association endorsed that view.

The realtors association, however, disputes the notion that interest rates would rise significantly. They note that rates on loans backed by the Department of Veterans Affairs are similar to those on FHA loans, even though the former don't involve the prepayment penalty.

Ginnie Mae and the mortgage bankers say the answer is to educate FHA borrowers to prepay loans at the end of the month. The realtors association says that is impractical because the closing date for a home sale or refinancing often depends on factors beyond the borrower's control.

The realtors are winning some support for their position. Rep. Bob Ney (R, Ohio) last week wrote to Ginnie Mae asking for an explanation of the policy, which he said appears "unreasonable." In effect, the Ginnie Mae policy is a prepayment penalty, said Howard Glaser, a mortgage industry consultant who was a senior HUD official during the Clinton administration. "If a private lender engaged in this," Mr. Glaser said, "HUD would call it predatory lending."