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FHA Publishes Guidance on Loans in Forbearance

The Federal Housing Administration (FHA) announced a new, temporary policy that provides guidance for lenders to obtain FHA insurance endorsement on mortgages on a forbearance plan. 

The policy will ensure that the safeguards of the FHA program continue to work for homeowners facing financial hardship due to COVID-19. 

“The Mortgagee Letter temporarily reverses the current FHA policy, which states mortgages that are in forbearance are not eligible for FHA insurance,” the FHA states. 

FHA’s temporary policy recognizes that there are borrowers who met all FHA requirements for a mortgage at the time of closing but were affected by the pandemic before FHA was able to endorse the loan for insurance. Additionally, this policy will help lenders, especially those small mid-sized, to better manage the potential liability of having to hold “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 Dr. Benjamin Carson, Secretary of the U.S. Department of Housing and Urban Development (HUD). “Today’s announcement will give borrowers, lenders, and the market peace of mind as we continue our road to economic recovery in the United States.”

According to the policy, the FHA will require lenders to provide an indemnification agreement to FHA for 20% of the original mortgage amount, which becomes payable if the mortgages goes into foreclosure and result in a claim to the FHA Mutual Mortgage Insurance Fund. 

“Maintaining a solid foundation to ensure the availability of FHA insurance during this difficult time for the nation includes helping lenders who are the mainstay of community-based lending to manage through the current economic environment,” said HUD Deputy Secretary Brian Montgomery. “This policy helps address current and future capital issues for all lenders, including those who are not equipped to hold mortgages on their balance sheets for extended lengths of time.”

Acting Federal housing Commissioner Len Wolfson said the actions taken by the FHA “ensures borrowers continue to have access to affordable mortgage financing.” 

“The indemnification agreement is the best way to balance the need to support market liquidity while also managing FHA’s credit risk exposure, all without disrupting the affordable mortgage insurance premiums borrowers enjoy today,” Wolfson said. 

The Mortgage Bankers Association’s (MBA) latest survey on forbearance and call volume on June 1 revealed the number of loans in forbearance increased 8.46% from the prior survey’s 8.36%. 

According to MBA's estimate, just over 4.2 million homeowners are now in forbearance plans.

About Author: Mike Albanese

Mike Albanese is a reporter for DS News and MReport. He is a University of Alabama graduate with a degree in journalism and a minor in communications. He has worked for publications—both print and online—covering numerous beats. A Connecticut native, Albanese currently resides in Lewisville.
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