Fha Mortgage Insurance Has Had A Confused History

If you're waiting to receive a mortgage-insurance rebate on a loan insured by the Federal Housing Administration after 1983, don't expect a prompt reply. The Department of Housing and Urban Development will take about 120 days to process your rebate after it has received a refund form from your lender.

Tack on the additional 60 days to get the form, and you're looking at a total of six months before receiving the rebate. Since about 10 percent of all homes in the Puget Sound area have FHA mortgages, that's a significant amount of local time - and money.

Mortgage insurance - required by all lenders when borrowers apply for more than 80 percent of the purchase price of the home - has had a confusing history with the FHA. The most recent development was the National Affordable Housing Act of 1990, which basically said (1) if you paid the mortgage insurance premium monthly, you could file for a refund prior to Nov. 5, 1990; (2) if you paid a lump-sum premium, you can file for a refund if you did not default on the loan.

Mortgage insurance, known to conventional lenders as Private Mortgage Insurance or PMI, differs from mortgage life insurance. PMI, which insures the investor in case the borrower defaults on loan payments, is required by lenders, while mortgage life is an option for the buyer. Typically, a mortgage life policy pays off the home, if the buyer dies or is disabled.

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 will not be 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.

If you are planning to sell and terminate your FHA loan, discuss the refund procedure with your lender. The lender will apply for a refund form, which takes about 60 days to receive.

For more information about the FHA Mortgage Insurance refund, write to: D-HUD, P.O. Box 44131, Washington, D.C. 20026-4136; or telephone 1-703-235-8117.

If possible, include your FHA case number (usually at the top of the insurance form you received when loan was approved) and the FHA program number. Also, list the date loan was approved and the date it was paid off, property address and your current address.

And, be patient.

Tom Kelly is a private real-estate consultant..