MBA Letter Asks FHA to Adjust Assumptions Fee Cap
The Mortgage Bankers Association, in a letter yesterday to FHA, expressed concerns about a $500 fee cap for processing assumptions for low-rate FHA mortgages and asked that the cap be adjusted to reflect actual costs lenders incur when processing an assumption.
The letter to HUD Principal Deputy Assistant Secretary Ed Golding urged FHA to update its policies and procedures regarding the assumption of FHA-insured mortgage loans.
“With many economists expecting interest rates to rise over the next few years, MBA anticipates that the number of assumption requests will grow as well,” wrote MBA Senior Vice President Residential Policy and Member Engagement Pete Mills. “Yet, certain FHA guidelines surrounding assumptions have not been updated since the mid-1980s, making it virtually impossible for lenders to recover the actual costs that are incurred while processing them.”
The letter noted all FHA loans are assumable, meaning that a homebuyer can take on the obligations of the existing note held by the seller, rather than originating a new loan.
“Assumable loans are an important source of affordable mortgage credit–especially in a rising rate environment, where consumers are able to obtain access to home financing at a below-market interest rate,” the letter said. “The assumption option also provides borrowers with the flexibility to take on the obligation of a family member or remove an ex-spouse from the loan.”
The letter pointed out that pursuant to FHA guidelines, lenders are required to honor all written requests to process assumptions with a formal release of liability for all mortgages executed after December 15, 1989. FHA guidelines also stipulate that prospective borrowers seeking to assume an existing mortgage must be qualified for creditworthiness by the lender in much the same way as if a loan were being originated.
“In a rising interest-rate environment, this option becomes increasingly popular, since borrowers would rather assume a lower rate than take on a new loan at a higher one,” MBA wrote. “This means that lenders with a significant number of FHA loans in their servicing portfolio must dedicate increased time and resources to processing assumption requests.”
Current FHA guidelines cap the maximum fee that lenders are allowed to charge to process an FHA assumption at $500 plus the cost of a credit report. “This $500 figure was set in 1986, and was not indexed for inflation,” MBA said. “It was also set in an era before lenders were required to complete a full underwrite of the assuming borrower and execute the release-of-liability. Today, after 30 years of inflation, rising loan processing costs, and a fundamental change in procedure, lenders lose money every time they process a loan assumption. Only a fraction of the work-hours and physical costs associated with conducting the creditworthiness review are recouped by the $500 assumption fee. Even without accounting for staff salaries, lender-incurred expenses in the assumption process ‘include underwriting and processing fees as well as third party charges for title agents and closing the loan.”
Based on MBA’s discussions with member companies, estimates for the total cost of processing an assumption file today range from $1,700 to $2,500. “If the $500 fee had been indexed for inflation in 1986, MBA estimates that the allowable fee today would have more than doubled,” MBA said.
In light of these facts, MBA urged FHA to raise the maximum fee that may be charged to process assumptions to $2,500 for all FHA loans currently held in a servicing portfolio and those that are originated in the future. MBA also requests that this $2,500 figure be indexed for inflation.
“These modifications will ensure that lenders are able to adequately cover their assumption processing costs today and in the future, and in so doing, will sustain the great benefit of assumability for generations of FHA borrowers to come,” Mills said.
