Refunds may await consumers willing to do a little digging

If you’ve been approached by a private company to help track down funds you might be owed from paying off a Federal Housing Administration home loan, try taking on the chore yourself. The steps are much easier than they used to be, and the cash could come in handy when those holiday credit card bills come due.

The U.S. Department of Housing and Urban Development, which oversees all FHA loans, increased its research efforts three years ago to locate about 348,000 homeowners owed $250 million in FHA mortgage-insurance refunds. However, some homeowners could not be found, usually because they had moved and the new mailing address was not in HUD’s records.

When a homeowner pays off an FHA-insured loan within five years, a portion of the mortgage insurance upfront premium is returned. It works much like a homeowner’s fire insurance policy that’s canceled before the term expires. If you pay $600 to insure your home for a year and move after eight months, a portion of the $600 is refunded.

Though HUD’s website for refunds, www.hud.gov/offices/hsg/comp/refunds/index.cfm, and its toll-free line, (800) 697-6967, have helped to ease the load, many consumers are still unaware they have a check coming.

If you believe you are due a refund, try to dig out your old FHA loan number and then check online or by phone. Your proper name may not be enough, especially if it is common, like Sanchez or Smith.

Lenders require mortgage insurance when borrowers apply for more than 80% of the purchase price of the home. It insures the investor (the lender) in case the borrower defaults on loan payments. So if you sold your home and the new owner assumed the loan, you are not eligible for a refund. That’s because there is still a risk of default. The insurance follows the loan and not the initial borrower.

On older FHA loans, mortgage insurance was part of the deal and had to be paid regardless of the equity position of the borrower. On newer FHA loans -- those placed after Jan. 1, 2001 -- mortgage insurance can be dropped when equity reaches 22% of the original appraised value and the borrower meets other guidelines.

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.”

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 to $900 each, depending on 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 and tell borrowers 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. So, 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.

Congress suspended this share program in 1990. The decision came on the heels of a PriceWaterhouse 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 and that only borrowers who prepaid the premium were eligible for a refund.

If there was an FHA loan in your past, there may be a refund in your immediate future. Take the time to check it out. It could mean help with those post-holiday debts.

Tom Kelly, former real estate editor for the Seattle Times, is a syndicated columnist and talk-show host. Send questions to [email protected].