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Are FHA Borrowers Forced to Pay Prepayment Penalties?

Ginnie Mae is forcing Federal Housing Administration borrowers to pay "prepayment penalties," according to the National Association of Realtors, and it wants the agency to change its policy.

NAR claims that over 425,000 borrowers in fiscal year 2003 paid an average of $622 in excess interest fees when they prepaid their FHA loans, due to a refinancing or the purchase of a new home.

When the borrower closes the FHA loan during the middle of the month, Ginnie Mae requires that the borrower pay interest until the end of the month.

"No other loans of any type that I know in the consumer arena are handled in such a manner," according to an NAR letter to Ginnie Mae. "Since Ginnie Mae does not object to having borrowers pay the interest, this allows lenders the leeway to charge this interest to the consumer."

By contract, investors in Ginnie Mae mortgage-backed securities are entitled to receive a full month's interest. And it has been Ginnie Mae's policy, since the agency issued the first MBS 34 year ago, to require the borrower to pay the extra interest.

Ginnie Mae recently completed a review of this longstanding policy and decided against any change.

Ginnie Mae vice president Michael Frenz said in an interview that requiring lenders/servicers to pay the extra interest would increase the cost structure for all FHA loans and negatively effect first-time homebuyers in terms of higher upfront fees and interest rates.

"The current policy does not affect first-time homebuyers," the Ginnie Mae VP for capital markets said.

The Mortgage Bankers Association also opposes any change to Ginnie Mae's policy, also claiming it would increase the cost to first-time homebuyers who depend on the FHA program.

"We think it is in the best interest of FHA consumers to benefit from the lowest price than an FHA product can offer," said MBA senior vice president Kurt Pfotenhauer.

MBA estimates that only 30% of borrowers got hit with an extra interest charge in 2003, while 70% of FHA borrowers closed near the end of the month or on the first day and incurred only marginal costs.

Overall, the extra interest paid by FHA borrowers totaled $200 million in 2003, according to MBA. However, MBA estimates the changes the Realtors are suggesting would cost $600 million a year and it would be spread across all FHA borrowers including first-time homebuyers.

(NAR and MBA estimates conflict because the mortgage bankers base their findings on the closing date, while the Realtors use the date FHA insurance is canceled).

On conventional loans, Freddie Mac pays the extra interest and Fannie Mae generally requires the servicer to pay the extra interest although it is determined on a negotiated basis.

Mr. Pfotenhauer noted that Ginnie Mae does not have the flexibility to run its MBS program like Fannie and Freddie. FHA has an excellent track record of helping low-income and minority homebuyers, the MBA SVP for government affairs said.

"We just think it would be bad policy to raise the cost of FHA loans at this point in time."

In response to the Realtors' complaints, Rep. Bob Ney, R-Ohio, has asked Ginnie Mae to explain its rationale.

"Without an explanation, it appears that the prepayment policy adversely impacts our American consumers," Rep. Ney says in a letter to Ginnie Mae president Ronald Rosenfeld. Mr. Ney chairs the House Financial Services subcommittee on housing.

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