Technology Transactionsby Peter G. Miller
Peter G. Miller
OurBroker®
Here"s a problem we"d all like to have: FHA has more than $16 billion in surplus funds, including an excess $5 billion collected in just the past year from FHA borrowers. This would be great news if FHA were a private company, but it isn"t and so we need to figure out who should get the stray billions FHA has collected.
The surplus money comes from "mortgage insurance premiums" (MIP) paid by millions of FHA borrowers. In exchange for financing with little down, FHA borrowers pay a fee up front, generally 2.25 percent of the amount borrowed, plus a .5 percent fee monthly on the outstanding loan balance. The up-front fee -- say $2,250 for a $100,000 mortgage -- can be added to the loan amount, thus reducing up-front cash costs while increasing the amount of mortgage debt which must be repaid.
The MIP money collected by FHA has an important purpose: it"s used to create a reserve fund. If a borrower defaults, FHA first tries to help the borrower and if that fails the agency must then sell the borrower"s property. The money from the sale is used to re-pay the lender. If the proceeds from the home sale are not sufficient to re-pay the lender, FHA steps in with money from its reserves. Given FHA guarantees, lenders are happy to make loans with substantially less than 20 percent down.
FHA, like insurance companies generally, is required to maintain a given reserve level, the "capital adequacy ratio." In the case of FHA, it must maintain reserves equal to 2 percent of its potential liabilities, but it now has reserves equal to 3.66 percent. In effect, FHA is collecting insurance premiums at almost twice the rate necessary to create adequate reserves and the result is that it sent $1.5 billion to the Treasury in 1999.
Now we know how FHA got its surplus money, the real question is how it should be spent.
One approach is to sell FHA foreclosures to local government at the rate of $1 per unit when such properties cannot be unloaded by the HUD agency within six months. "The initiative," says HUD, "won"t cost taxpayers a penny. Because of improvements in FHA management and because few FHA-insured home loans default, FHA"s revenues exceeded expenses and the agency returned about $1.5 billion to the U.S. Treasury in 1999."
To be polite, this is a unique and inventive explanation. Let"s look at what it implies.
*The HUD initiative "won"t cost taxpayers a penny." This is a clever use of language. It"s true the money is not coming from general tax revenues -- it"s coming from over-charged borrowers.
*What has lead to reduced FHA default rates? Should we ignore the longest sustained economic expansion in U.S. history?
*Since when is FHA supposed to be a profit-making entity that generates money for the U.S. Treasury? If that"s its purpose, should it not conform to the standards we set for companies in the private sector? Should it be part of HUD at all?
MIP exists to create reserves for FHA borrowers. MIP is not a tax, it has never been intended to be a tax, and it should not now become a tax. There should be no money to turn over to the Treasury, not a dime.
Moreover, MIP is not a transfer tax, money collected from one set of taxpayers to benefit another set. MIP is collected for the purpose of establishing adequate FHA reserves, not creating new HUD programs.
The issue here is not whether HUD should give away homes, but rather whose money is being used to pay for such good works. It"s not taxpayer money, it"s borrower money, money paid to establish an insurance reserve fund. If HUD wants to establish programs which enable buyers to purchase properties for $1 apiece, that"s fine -- just get an authorization from Congress.
As to the excess dollars now being collected by FHA, there are several ways to fairly and reasonably use such monies:
*Refund excess payments to current FHA borrowers.
*Reduce the up-front MIP charge so more people can qualify for FHA financing -- that is, after all, FHA"s core goal.
*End monthly FHA MIP payments once a borrower has 20 percent equity plus a
good payment history. If this policy is good enough for Fannie Mae and
Freddie Mac, why not FHA? Such a policy would reduce borrower costs and thus
make homes more affordable and raise homeownership levels.
The Common-Sense Mortgage
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Question Of The Week
Q In the process of making an offer to purchase a home, my broker suggested adding a contract "addendum" to assure that certain repair work is completed before closing. Okay, so what"s an addendum?
A Most areas of the country use standardized agreements to close real estate sales. There are different forms for different areas and a form that works one place may be inappropriate elsewhere. Some forms are mandated by state government, some are widely used because they"re popular in the real estate community.
Forms, by their nature, relate to a given set of issues -- but perhaps not all issues or all perspectives. A proper "addendum" is a written addition to an offer which outlines terms not covered on the form agreement, or not covered as one party to the transaction wants them covered. If the agreement is accepted, all attached addenda are also accepted.
Writing addenda is not a casual matter. Such contract additions can powerfully impact basic form language. Brokers routinely have standardized addenda on hand that have been developed with the assistance of attorneys who specialize in real estate issues.
For consumers, it"s best to obtain standardized agreement forms when first listing property or engaging a buyer broker. Read such material and ask questions. Your broker or attorney, as appropriate, can provide specific information and develop the addenda you require.
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