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Mortgage Bankers Want Billions For FHA

by Peter G. Miller
June 22nd, 2009

We have been pointing out for some time that all the clamor and commotion regarding the FHA reserve fund is largely nonsense.

It’s true that the FHA reserve fund has fallen in the face of larger claims, but it’s also true that the FHA has given away billions of dollars to the Treasury Department, money that comes from borrower insurance premiums. If anyone believes that the reserve fund should be enlarged then surely they must also believe that the FHA should not be forced to give away premium dollars.

Money from FHA borrowers is paid for upfront and ongoing insurance premiums. The money collected is held in reserve to pay off claims against the program. For loans originated before December 8, 2004 any excess premium money was returned to borrowers in the form of a rebate once the mortgage was paid off. In other words, the program was a mutual insurance plan.

Bilions Lost

Money which could have been keep by the FHA to bulk up the reserve fund, or money which could have been repaid to borrowers, has instead been sent to the Treasury Department. Why add FHA money to the Treasury? Because that’s one way to hold down debt without a general tax increase. The insurance money paid to the Treasury Department is effectively a tax on FHA borrowers.

So how much has been paid to the Treasury Department? HUD tells me that the total is in excess of $14.4 billion since 2001.

Now the folks at the Mortgage Bankers Association have seen the light and are asking that the FHA be allowed to keep borrower funds. David G. Kittle, Chairman of the Mortgage Bankers Association, told Congress last week that “we need to give FHA the resources it needs to operate in an increasingly nimble and high-tech real estate finance industry. FHA’s market share has risen from 3 to 30 percent virtually overnight, but it’s still hampered by outdated technology and its staff is stretched thin. The result is a diminished ability to detect and root out fraud, remove bad actors from the program, approve new lenders, and process mortgages.

“The solution is fairly straight-forward,” said Kittle. ” Under HERA, Congress has already authorized $25 million per year for staffing and technology upgrades. Now we need to work together to make sure this funding is appropriated. MBA also supports putting FHA on a level playing field with other financial regulators, so it can recruit better talent. And FHA should be able to keep some of the premiums it collects, so it doesn’t have to come begging for funding.”

Return Borrower Money

Not only should the FHA be allowed to keep the premiums it collects when they’re necessary for the system to work, but when the system produces excess money — what private-sector companies would call a profit — those savings should be returned to its rightful owners, FHA borrowers.

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