As reported by LendingTree earlier this year, HUD is considering a new policy which will end so-called post-settlement interest fees on FHA loans, interest charged even though a loan has been paid off. Now the National Association of Realtors has joined the fight, arguing that the policy is antiquated and unreasonable.
The FHA is well-known for not requiring prepayment penalties, the often heavy costs charged with some private-sector loan programs. However, the FHA has long assessed something called post-settlement interest charges.
With a post-settlement interest charge an FHA borrower pays a full month's interest for the final month of the loan -- regardless of the date of settlement. In other words, if you refinance or sell a home and closing is June 3rd you still have to pay interest as if the loan is outstanding through June 30th.
Post-Settlement FHA Mortgage Charges
HUD says that in 2012 FHA borrowers paid out $449 million in post-settlement fees. In 2011, says NAR, borrowers were hit with $597 miilion in post-settlement fees.
Borrowers also paid out a lot of money on an individual basis. Imagine that you're paying off an FHA loan with a $150,000 balance at 4.5 percent. Interest for the month is $562.50. If you pay on June 3rd you should owe the lender interest for three days -- $56.25 in this case. Instead you have to pay the entire $562.50. That's $506.25 in extra interest for a loan which has been paid off.
"Given the high rate of refinancing and new mortgages in this current market, it is difficult to select the date of closing," said NAR in a May 7th letter to FHA Comissioner Carol Galante. "Even when consumers are aware of the pre-payment penalty, they are on the timetable of the buyer, the settlement company, title company and mortgage lender and cannot always close on the last day of the month. When closings are delayed, borrowers can be required to pay close to an entire extra month of interest on loans they no longer have and often unexpected burden."
Why the FHA started the post-settlement interest charge policy is unclear and why it continues is equally baffling because it's not HUD which is getting the excess money, it's lenders.
HUD, according to NAR, is concerned that if the excess-interest policy is changed lenders might "look elsewhere to recoup these costs, charging a higher interest rate or servicing fee differential on all FHA-insured loans than they might have otherwise charged."
NAR feels such concerns are "overstated" and argues that "conventional loans, as well as loans from the Veterans Administration’s Loan Guaranty Program and the U.S. Department of Agriculture’s Rural Housing Service loan program, do not have post-payment interest charges."
The view here is different: Post-settlement interest charges should never have been allowed in the first place, there is nothing to recoup, just the end of a sweetheart deal that has cost FHA borrowers hundreds of millions of dollars per year in unjustified fees. To align with Wall Street Reform and the Consumer Financial Protection Bureau HUD needs to change the current post-settlement policy, and it should do so as quickly as possible.