The source of all the controversy: The Federal Housing Administration’s longtime policy of allowing banks to charge homeowners a full month’s worth of interest when they went to pay off their FHA-insured loans — even after they had paid back all the principal they owed.
To illustrate: Say you were preparing to pay off your mortgage balance in full on May 3. Under the government’s policy, lenders were permitted to charge you interest on the paid balance though May 31, collecting it at the closing May 3. It was the equivalent of being charged for a full tank of gas, even though all you pumped was 3 gallons.
The official rationale for the controversial policy was that mortgage bond investors expected full months’ worth of interest payments on FHA loans, not partial payments. Unless borrowers paid off their loans on the first of the month, the lender could charge them interest for the full month. But FHA was alone in its stance on this. Neither of the two giant mortgage players, Fannie Mae and Freddie Mac, forced consumers to make extra interest payments on loans to please Wall Street. Nor did the Department of Veterans Affairs do so on its home mortgages. FHA officials also argued that because of the opportunity lenders have to charge additional interest, they typically quote more favorable interest rates on FHA loans — 0.10 percent to 0.15 percent lower — compared with non-FHA loans.
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