January 9, 1998

Getting money back from FHA

By TOM KELLY
The Real Estate Advisor

A few weeks ago, when the government announced it was looking for 100,000 homebuyers it owed $70 million in mortgage refunds, I pulled on a heavy jacket and headed to the garage in search of my dusty, dank and extremely dull loan files.

Was there a mortgage insured by the Federal Housing Administration in my past? I didn't think so, but an inner-city "project" more than 10 years ago could have been a candidate. And, if so, what a great way to pay off the Christmas credit card!

More than a decade ago, before our kids brought home tuition bills, we borrowed against our home to provide the downpayment on a $53,500 fixer. The house was to be used by graduate students seeking an alternative to dormitory living while chasing degrees in religious education. They rent they paid covered the monthly debt and we sold the home five years later when they moved on.

I finally located the file in a corner of the garage. Yes! The loan for the inner city home was insured by FHA and because the premium was paid at closing, $1,727.10 of our downpayment went to the Department of Housing and Urban Development.

Wow! How much of that $1,727.10 would be returned to me?! Newspaper reports stated the average refund was $700. If there was one time of the year when I could use a windfall, this would be the time.

My ancient computer could not access HUD's Web site at http://www.hud.gov/cgi-bin/refund so I telephoned the toll-free line at 1-800-697-6967.

After waiting what seemed to be an eternity, a HUD representative told me that my case number was found but my name was not on the refund list. How could this be?! Besides, I had already mentally paid some Christmas bills with the proceeds.

Last week, the explanation arrived in the mail. The loan had been assumed by the buyer when we sold the home. When an FHA loan is assumed, the insurance remains in force and the seller receives no refund. The owner of the property at the time the insurance is terminated (loan paid off) is entitled to any refund.

This seemed unfair to me. I paid for the insurance, up front and in one lump sum, and should be the recipient of any refund.

"If the loan is still in place, there is still a risk of default," said Dave Rodgers, director of single-family housing in HUD's Northwest Regional office. "The insurance follows the loan and not the person."

Geez, talk about coal in your stocking . . .

Mortgage insurance is required by lenders when borrowers apply for more than 80 percent of the purchase price of the home. It insures the investor (lender) in case the borrower defaults on loan payments. The FHA used to let borrowers pay monthly but now requires a lump-sum payment at closing. The FHA owes refunds to borrowers who prepay mortgage loans taken out after 1983 because they prepaid their mortgage insurance - 3.8 percent of the loan amount. So if the loan is paid off early, they are due a refund.

Before 1983, borrowers were permitted to make monthly mortgage-insurance payments. The money from a large group of loans was pooled into a fund similar to a mutual fund. The fund was reviewed each year. If there was more interest earned on the investment than was used up by foreclosures that the insurance covered, then a dividend was declared. Each loan holder in that particular fund was due a share, called a "distributive share."

It was this distributive share program that Congress suspended in 1990. The decision came on the heels of a Price Waterhouse study that found the fund was unsound and faced continuing losses unless modified. So, the National Affordable Housing Act basically stated that all monthly payments were out the window (similar to "term" life insurance) and that only borrowers who prepaid the premium were eligible for a refund.

Some years, there were no refunds at all because defaults ate up the earnings. Other times, the amount of the share was substantial, with borrowers receiving $700-$900 depending upon the number of defaults in a particular fund. The refund was payable when a house was sold and the FHA-insured loan was paid off and terminated (not assumed by another party). Lenders were required to notify HUD that the loan was paid off, and inform borrowers on how to file a refund claim.

Sometimes the refund process was overlooked and borrowers had to file their own claims. In fact, before 1981, the government made little or no attempt to notify eligible homeowners that a refund was due them. As a result, many refunds were not paid. To compound the problem, there was a six-year statute of limitations on unclaimed FHA refunds until 1984. For example, if you sold your FHA home in 1977 and had not filed for a refund by 1983, your potential share was lost. And if you were paid and forgot about it, there was no way to double-check. The Treasury Department didn't retain canceled checks.

Borrowers who took out FHA loans after 1983 are not affected. That's because these borrowers prepaid their entire mortgage insurance premium, 3.8 percent of the mortgage amount. When these loans are repaid, borrowers should get a proportionate amount of the total premium paid. It works much like a homeowner's fire insurance policy that's canceled before the term expires. If you pay $550 to insure your home for a year and move after eight months, a portion of the $550 would be refunded.

In my case, $596.74 of the original $1,727.10 is waiting for Peter A. West, wherever he may be. He assumed the loan of that inner-city fixer -- yet I still paid the cash!

Previous columns:

• Big tax cuts coming to real estate, 12-12-1997
• Will better trained salespeople increase minority homeowners?, 12-05-1997
• Home loan rates will remain flat, 11-27-1997
• Boeing, CB-Bain sign affinity marketing deal, 11-21-1997
• Home-equity: Should you bet the roof?, 11-07-1997
• Builder sweetens Costco dealer for agents, 10-31-1997
• Should you increase your title insurance coverage?, 10-24-1997
• As interest rates dip, refinancing options abound, 10-10-1997