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Mortgage

FHA enacts temporary policy shift on forbearances

CHLA pushes back on 20% first loss penalty

The Federal Housing Administration introduced a temporary policy designed to offer guidance for lenders on how to obtain FHA insurance endorsements on mortgages where the borrower either obtained or requested a COVID-19 forbearance.

Current FHA policy prevents mortgages that are in forbearance from being eligible for FHA insurance. According to the agency, the temporary policy is aimed at borrowers who met all FHA requirements for a mortgage at the time of closing but were impacted by the COVID-19 pandemic before receiving the FHA’s endorsement for insurance on the loan.

Under the terms of the new policy, lenders must provide an indemnification agreement to FHA for 20% of the original mortgage amount, which only becomes payable if the mortgage goes into foreclosure and results in a claim to the FHA Mutual Mortgage Insurance Fund.

The FHA stated it would not require upfront payments by lenders or a change to FHA mortgage insurance premiums for these mortgages, adding the indemnification agreement is between the lender and FHA and “will generally result in a reduction of the claim amount FHA would need to pay to the lender for defaulted mortgages.”

The agency did not state how long the policy would be in effect, but noted it would be of particular value to small and mid-sized community-based lenders as a tool for better managing the potential liability connected to holding uninsurable loans.

“FHA has continually been at the forefront of providing assistance and assurance for borrowers, lenders, and the mortgage market since the coronavirus pandemic began,” said Department of Housing and Urban Development Secretary Ben Carson in a statement, adding the policy change “will give borrowers, lenders, and the market peace of mind as we continue our road to economic recovery in the United States.”

However, the policy shift is coming at a time when forbearance levels appear to be in decline. Data released today by Black Knight determined 8.9% of all mortgages – or 4.73 million homeowners – are currently in forbearance, with active forbearance volumes down by a net 34,000 over the past week – the first weekly decline since the pandemic began.

The Mortgage Bankers Association also noted forbearance levels were not in rapid ascension.

MBA’s survey continues to indicate that fewer homeowners are seeking forbearance as more states across the country reopen their economies and prospects begin to improve,” said Mike Fratantoni, senior vice president and chief economist. “The share of loans in forbearance increased by only 10 basis points over the week of May 24.”

While the MBA did not publicly comment on the change to the FHA policy, the Community Home Lenders Association demanded the FHA immediately rescind its actions.

“The Community Home Lenders Association calls on FHA to immediately rescind its policy announced yesterday to impose a 20% first loss penalty on lenders that originate well underwritten loans that go into forbearance before the loan can be formally insured,” said Scott Olson, CHLA’s executive director.

“This policy basically encourages lenders to create credit overlays based on FICO score, the type of job the borrower holds, and other inappropriate factors. CHLA calls on FHA to work with Congress, lenders and consumer groups to re-think and re-work the appropriate FHA forbearance policy to better balance taxpayer and borrower interests.”

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