By Kenneth R. Harney, Boston Herald
Could the federal government’s booming FHA mortgage program be forcing homeowners to pay tens of millions of dollars of extra interest charges when they sell their houses or refinance loans?
Critics say yes. The government says the critics aren’t providing the full picture.
Those critics include Sen. Ben Cardin (D-Md.), who is sponsoring legislation that would prohibit FHA lenders from collecting a full month’s worth of interest from sellers and refinancers who pay off their mortgages — go to settlement — before the final day of the month.
No other major source of financing, not Fannie Mae, Freddie Mac or the Veterans Affairs Department, requires interest payments from borrowers beyond the date they pay off their loans. On an FHA loan, if you sell your house and go to closing early in the month, you are charged interest through the rest of the month.
To illustrate: Say you pay off a $200,000 FHA-insured mortgage on the fifth day of April. You’ll be charged an extra $820 to cover interest for the month’s remaining days, according to estimates prepared by the National Association of Realtors, which supports Cardin’s bill.
If the same loan is paid off on April 15, the interest levy would total $492.
Where does the money go? Ted Tozer, president of the Government National Mortgage Association, which bundles FHA loans into bonds and sells them to investors, says it flows to bondholders, who are guaranteed payment of interest for the full month even if the balance is paid off much earlier.
Tozer maintains that the direct payment approach has afforded FHA borrowers a slight discount on their initial interest rates, probably in the range of 0.10 percent to 0.15 percent, compared with conventional loans.
But critics charge that the extra interest taken from FHA sellers and refinancers exerts a far greater personal economic impact — often cutting their proceeds by hundreds of dollars — than the barely perceptible rate break they received on the mortgage itself.
“This is an issue of fairness,” Cardin says. “Home- owners should not have to pay interest on loans that they have fully repaid.”
