Loan Modification

Are FHA Cash Refunds Coming?

By Peter G. Miller

A letter from HUD to lenders last week suggested that there might be a situation where borrowers can walk away from closing with actual green cash.

“Due to the change in up-front mortgage insurance premiums (UFMIP),” said HUD, “there may be an opportunity for FHA-to-FHA refinance borrowers to receive cash refunds for unearned MIP premiums that had been financed through their FHA-insured loan. FHA is now reviewing a process to provide the benefit of the unearned MIP to eligible borrowers. FHA will be releasing policy guidance shortly.”

Hmmm. Is this a big deal? Actually, it may be.

The latest figures from HUD show that through August some 322,795 borrowers refinanced one FHA loan with a replacement FHA mortgage. That’s a lot of people and suggests that a new policy which allows refunds for FHA-to-FHA refinancing could help many homeowners.

How much money may be involved is unclear at this writing. However, consider that the old FHA up-front premium was 2.25 percent, a cost which has been reduced to 1 Percent starting this month. Perhaps the idea is to have some sort of a credit related to the new and lower up-front fee.

Alternatively, the annual mortgage insurance premium has been increased from .55 percent for most borrowers to .9 percent.

So, perhaps there will be a refund table showing how much is due back to the borrower depending on how long the loan has been outstanding.

The History of Refunds

The FHA loan program started out as a mutual insurance plan, meaning that borrowers would effectively pocket any profits made from the program.

The idea was that you would take out an FHA loan and then when the loan was paid off or the property was sold you might get a refund based on the claims made against the program. A lot of people did get such refunds, but unfortunately the refund part of the program ended for FHA loans originated after December 8, 2004.

A New Round of Refunds?

The HUD announcement suggesting the possibility of refunds for FHA borrowers is odd in the sense that there didn’t seem to be much of an outcry for such give backs, or — for that matter — any outcry. Given that the government is not know for such charitable gestures, and given that the general refund program ended six years ago, it’s hard to see why this matter has arisen.

It may be that there is a murky legal guideline which needs to be followed and thus HUD is starting the program to avoid a suit by some pesky lawyer. Whatever the reason, this is one of those deals which if ultimately true could benefit a lot of people — say 30,000 a month or so. At a time when the economy remains in serious trouble good news is good news and very welcome.

Full post as published by FHA Mortgage Guide on October 13, 2010 (boomark / email).