The country's largest source of federal help for homebuyers has put the finishing touches on its new year's plans for cutting costs for mortgage customers. The final details look good for hundreds of thousands of buyers and owners in 2001 but may be disappointing for some borrowers from earlier years.
In its waning days in office, the Clinton administration has made good on its promise to reduce upfront expenses for new FHA loan applicants -- chopping insurance premiums from 2.25 percent of the mortgage amount to 1.5 percent for all loans closed after Jan. 1.
That's excellent news for the estimated 1 million new borrowers -- primarily first-time, moderate-income purchasers -- who will take out FHA mortgages this year. On a $220,000 home loan, the savings will be about $1,500. Borrowers on a $100,000 mortgage should save about $750.
More good news will be on the way shortly for an estimated 200,000-plus FHA borrowers who pay off their mortgages this year through home sales or by refinancing. They will receive an average $700 refund from the FHA for being good customers for extended periods of years, according to lameduck FHA Commissioner William C. Apgar. The refund amount will reflect their "distributive share" in the profits generated by FHA's highly successful mortgage insurance operations in recent years.
On Jan. 1, FHA also began implementing its new policy of automatically canceling collection of monthly mortgage insurance premiums once borrowers build up equity stakes equal to at least 22 percent of the original sale price or appraised value of the property. The new policy puts FHA borrowers -- beginning with this year's new crop -- on a par with borrowers who opt for "private mortgage insurance" (PMI) on low down payment, conventional loans.
In 1998, Congress required private mortgage insurers to cancel premium payments automatically when borrowers pay down their loans sufficiently to attain 22 percent equity interests in their properties. The law did not cover FHA-insured mortgage transactions, an omission that the Clinton administration's new policy change seeks to rectify.
But there's a key difference between Congress' PMI cancellation rules and the new FHA guidelines. With PMI, certain borrowers -- primarily those whose loans are owned by giant investors Fannie Mae and Freddie Mac -- have the right to request cancellation of premium payments when their property values have risen enough to give them 22 percent or higher equity. Both Fannie and Freddie now routinely allow borrowers to demonstrate that they've reached the required equity levels, and to shed their monthly PMI payments.
Under the new FHA guidelines, the only way for eligible borrowers to terminate mortgage insurance premium payments early is to pay extra amounts toward reduction of the principal -- that is to speed up the normal amortization process. There is no separate provision for submitting appraisal documentation to FHA to show that the house has appreciated rapidly and that the owners' equity stake exceeds 22 percent. Nor does the new policy reach back to FHA's pre-2001 pool of customers. They're untouched by the new plans and cannot terminate insurance payments during the life of their loans.
In an interview, FHA's Apgar acknowledged that for some borrowers, this will be disappointing. He noted that the agency seriously studied the possibility of including such a borrower-initiated system for cancellations comparable to Freddie's and Fannie's, but concluded that it would be too difficult to implement under the present program structure. However, said Apgar, FHA "has to keep up with the competition" -- PMI -- and could reopen the issue.
But Apgar won't be around to push through those changes. He and Housing and Urban Development Secretary Andrew M. Cuomo are out of jobs as of Saturday, departing with the Clinton administration.
An FHA reformer who expects to be staying around considerably longer could come to some borrowers' aid. Rep. James V. Hansen, a Utah Republican, plans to reintroduce a bill he wrote late last year that would extend FHA automatic cancellation rights to as many as another 1.5 million borrowers -- those who closed their home mortgages after July 29, 1999. Under his bill, all FHA borrowers would have the identical rights to automatic cancellation when their loans amortize to 22 percent equity levels as those paying PMI.
An aide to Hansen confirmed that given FHA's importance to first-time and moderate-income homebuyers, Hansen remains interested in making FHA at least as friendly to consumers as PMI.
Kenneth R. Harney is a syndicated columnist. Send letters in care of the Washington Post Writers Group, 1150 15th St. N.W., Washington D.C. 20071.