www.hudclips.org U. S. Department of Housing and Urban Development Washington, D.C. 20410-8000 October 22, 1993 OFFICE OF THE ASSISTANT SECRETARY FOR HOUSING-FEDERAL HOUSING COMMISSIONER Mortgagee Letter 93-36 TO: ALL APPROVED MORTGAGEES SUBJECT: Changes in Premium Refund Computations This letter transmits changes to the current method used to calculate the amount of unearned premium available for: (1) refund to the mortgagor (homeowner) upon prepayment or voluntary termination of the insurance or (2) offsetting against the new mortgage insurance premium (MIP) when processing FHA to FHA refinanced mortgages. These changes are being implemented in order to meet the actuarial soundness requirements of the National Affordable Housing Act. REVISED FACTORS Based on an actuarial analysis of the MMI Fund, HUD has revised the method of calculating premium earnings for all mortgage insurance where a prepaid premium amount was received. Improvements in the calculation procedures will also simplify the process of determining the amount of unearned premium available for refund or refinance credit application (netting). These revised factors apply to all FHA insured mortgages regardless of mortgage term. The current procedure calculates the premium refund as a percentage of the original mortgage amount and the period of insurance. In contrast, the new procedure calculates the amount of the premium refund as a percentage of the initial MIP paid on the mortgage being terminated or refinanced and the period of insurance. It is important to note that no premium refund remains at the end of the 7th year of amortization, i.e., beginning in the 84th month. Attachment 1 provides revised instructions for calculating the premium refund. Attachment 2 is a chart showing the revised premium refund factors used in the premium refund calculation. Attachment 3 updates the instructions for processing FHA-to-FHA refinanced mortgages where a premium refund is available for netting. _____________________________________________________________________ IMPLEMENTATION DATE These changes will be in effect for all terminations and refinances closed on or after January 1, 1994. If you have any questions, please contact Joseph McCloskey at (202) 708-2438. Very sincerely yours, Nicolas P. Retsinas Assistant Secretary for Housing - Federal Housing Commissioner Attachments 2 _____________________________________________________________________ ATTACHMENT 1 COMPUTING PREMIUM REFUNDS FOR PREPAID FHA MORTGAGE INSURANCE PREMIUMS (MIP) EFFECTIVE JANUARY 1, 1994 BACKGROUND Effective September 1, 1983, the Federal Housing Administration (FHA) implemented a one-time (prepaid) mortgage insurance premium (OTMIP) collection system for mortgages insured under the Mutual Mortgage Insurance Fund. A feature of the OTMIP collection system required FHA to refund any unearned OTMIP to the homeowner when the mortgage is paid in full before the end of the mortgage term. In September 1987, for FHA to FHA refinances where a premium refund was due, HUD began to allow the offsetting of any MIP refund due from the old mortgage against the MIP due HUD for the new mortgage. In 1991, the Cranston-Gonzalez Act further modified the premium collection system by mandating an additional risk-based premium requirement. In addition to the collection of an upfront (prepaid) premium, monthly premiums must be paid for a period of years based on loan-to-value ratio. COMPUTING THE PREMIUM REFUND Mortgage data for the mortgage being paid-off, assumed, or refinanced, i.e., the old mortgage, is required to compute the premium refund. The amount of MIP paid and the first payment date should be obtained from the borrower's closing documents, the mortgage instrument, or the servicing mortgagee. Use this information to complete the following steps: 1. List the original MIP amount: $ __________ 2a. Determine the period of insurance in months: __________ The period of insurance begins when the mortgage starts to amortize, i.e., 1 month prior to the first payment due date of the mortgage, and ends at the end of the month in which the mortgage is paid in full, assumed, or refinanced. For example, a mortgage with a first payment due date of April 1, 1991, was paid-off on December 15, 1992, has a period of insurance of 22 months (March 1991 - December 1992). NOTE: No premium refund remains for mortgages with a period of insurance equal to or greater than 84 months. 3 _____________________________________________________________________ 2b. Select the premium refund factor: __________ Select the applicable factor from the Premium Refund Factor table (Attachment 2) by using the period of insurance stated in step 2.a. 3. Compute the premium refund amount: Original MIP amount (1) $ _________ Premium Refund factor (2.b.) X _________ Premium refund available $ ========= Multiply the amount of the MIP paid for the old mortgage (step 1) by the premium refund factor (step 2.b.). The result is the amount of MIP refund available for refund or offset against the new mortgage MIP (refund credit). 4 _____________________________________________________________________ ATTACHMENT 2 =========================================================================== REVISED MIP REFUND FACTORS ___________________________________________________________________________ YEAR 1 YEAR 4 YEAR 7 _______________________ _______________________ _______________________ Month 1 0.9917 Month 37 0.5840 Month 73 0.0770 _______________________ _______________________ _______________________ Month 2 0.9833 Month 38 0.5660 Month 74 0.0700 _______________________ _______________________ _______________________ Month 3 0.9750 Month 39 0.5480 Month 75 0.0630 _______________________ _______________________ _______________________ Month 4 0.9687 Month 40 0.5300 Month 76 0.0560 _______________________ _______________________ _______________________ Month 5 0.9583 Month 41 0.5120 Month 77 0.0490 _______________________ _______________________ _______________________ Month 6 0.9500 Month 42 0.4940 Month 78 0.0420 _______________________ _______________________ _______________________ Month 7 0.9417 Month 43 0.4760 Month 79 0.0350 _______________________ _______________________ _______________________ Month 8 0.9333 Month 44 0.4580 Month 80 0.0280 _______________________ _______________________ _______________________ Month 9 0.9250 Month 45 0.4400 Month 81 0.0210 _______________________ _______________________ _______________________ Month 10 0.9187 Month 46 0.4220 Month 82 0.0140 _______________________ _______________________ _______________________ Month 11 0.9083 Month 47 0.4040 Month 83 0.0070 _______________________ _______________________ _______________________ Month 12 0.9000 Month 48 0.3860 Month 84 0.0000 _______________________ _______________________ _______________________ YEAR 2 YEAR 5 YEAR 8 _______________________ _______________________ _______________________ Month 13 0.8917 Month 49 0.3720 Month 85 _______________________ _______________________ Month 14 0.8833 Month 50 0.3580 and beyond 0.0000 _______________________ _______________________ _______________________ Month 15 0.8750 Month 51 0.3440 _______________________ _______________________ _______________________ Month 16 0.8667 Month 52 0.3300 _______________________ _______________________ _______________________ Month 17 0.8583 Month 53 0.3160 _______________________ _______________________ _______________________ Month 18 0.8500 Month 54 0.3020 _______________________ _______________________ _______________________ Month 19 0.8417 Month 55 0.2880 _______________________ _______________________ _______________________ Month 20 0.8333 Month 56 0.2740 _______________________ _______________________ _______________________ Month 21 0.8250 Month 57 0.2600 _______________________ _______________________ _______________________ Month 22 0.8167 Month 58 0.2460 _______________________ _______________________ _______________________ Month 23 0.8083 Month 59 0.2320 _______________________ _______________________ _______________________ Month 24 0.8000 Month 60 0.2180 _______________________ _______________________ _______________________ YEAR 3 YEAR 6 _______________________ _______________________ _______________________ Month 25 0.7835 Month 61 0.2068 _______________________ _______________________ _______________________ Month 26 0.7670 Month 62 0.1957 _______________________ _______________________ _______________________ Month 27 0.7505 Month 63 0.1845 _______________________ _______________________ _______________________ Month 28 0.7340 Month 64 0.1733 _______________________ _______________________ _______________________ Month 29 0.7175 Month 65 0.1622 _______________________ _______________________ _______________________ Month 30 0.7010 Month 66 0.1510 _______________________ _______________________ _______________________ Month 31 0.6845 Month 67 0.1398 _______________________ _______________________ _______________________ Month 32 0.6680 Month 68 0.1287 _______________________ _______________________ _______________________ Month 33 0.6515 Month 69 0.1175 _______________________ _______________________ _______________________ Month 34 0.6350 Month 70 0.1063 _______________________ _______________________ _______________________ Month 35 0.6185 Month 71 0.0952 _______________________ _______________________ _______________________ Month 36 0.6020 Month 72 0.0840 =========================================================================== 5 _____________________________________________________________________ ATTACHMENT 3 PROCESSING INSTRUCTIONS FOR NETTING PREMIUM REFUNDS NOTE: This is an option a lender may choose to exercise when refinancing from an FHA-insured mortgage to another FHA-insured mortgage. REFINANCING MORTGAGEE ACTIONS: 1. Compute the MIP refund amount. Refer to the refund calculation instructions in Attachment 1 and compute the premium refund. 2. Obtain a netting authorization number. Contact HUD at (703) 235-8117 to obtain an authorization number. Verify that the premium refund is correctly calculated. The data used to calculate the premium refund should be the same as the information maintained in HUD records. 3. Compute the new mortgage MIP amount. a. Determine the base loan amount of the new mortgage. b. If the MIP for the old mortgage was financed, subtract the calculated premium refund (see Attachment 1) from the base loan amount. This avoids paying a new MIP on the refund credit amount. c. Add the costs of refinancing, where authorized. The result is the new mortgage amount before MIP, if financed. d. Select the applicable MIP factor from the premium calculation table below. Multiply the mortgage amount before MIP (step 3.c.) by the factor selected. PREPAID (UPFRONT) PREMIUM CALCULATION TABLES Use this table for all mortgages except streamline refinances where the "old" mortgage closed on or before July 1, 1991. ================================================== MORTGAGE PREMIUM TERM FACTOR __________________________________________________ More than 15 years .030 __________________________________________________ __________________________________________________ 15 years or less .020 ================================================== 6 _____________________________________________________________________ Use this table for streamline refinances where the "old" mortgage closed on or before July 1, 1991. ================================================== MORTGAGE PREMIUM TERM FACTOR __________________________________________________ More than 15 years .038 __________________________________________________ __________________________________________________ 15 years or less .024 ================================================== NOTE: See Mortgagee Letter 92-14 for details regarding streamline refinances exempt from the annual premium. 4. Determine the refund credit amount. Determine the amount of refund credit to be included in the settlement. This is the portion of the premium refund used to net against the new mortgage MIP amount. a. Select the lesser amount of the premium refund (step 1) or the new MIP (step 3.d.). NOTE: The refund credit for netting cannot exceed the MIP due HUD for the new mortgage. Any excess premium refund, i.e., when the premium refund exceeds the new MIP, will be paid by HUD directly to the mortgagor. 5. Net the refund credit in the settlement. Subtract the MIP refund credit amount (step 4) from the new MIP amount (step 3.d.) to determine the net amount of MIP due HUD for the new mortgage, if any. When the premium refund equals or exceeds the new MIP, this amount will be $.00. 8. Remit the net MIP and refund credit data to HUD. Access the ACH system and key in the transaction data. ACCURATE SUBMISSIONS Endorsement of the new mortgage for FHA insurance may be delayed pending resolution of any problems. Therefore, accuracy in computing and reporting premium refund data is essential to the successful completion of the refund netting process. *U.S. G.P.O.:1993-301-054:80221 7