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Study: Federal Mortgage Penalty Could Block Homeownership

A new research paper from the Urban Institute is accusing the Federal Housing Administration (FHA) and the GSEs of potentially profiting from a new penalty that could prevent more than a quarter-million borrowers from obtaining purchase loans or refinancing.

The research paper, “A New Mortgage Penalty Is Blocking Homeownership and Refinancing Opportunities for 255,000 Borrowers,” focused on federal housing policy changes created in the wake of the economic turmoil from the COVID-19 pandemic. These policy changes are aimed at loans that go into forbearance before being packaged into the secondary market.

The Urban Institute observed that Fannie Mae and Freddie Mac placed an additional 5% delivery fee for first-time homebuyers and a 7% fee on all other purchase borrowers and rate-and-term refinances, excluding cash-out refinances that are in forbearance. For its part, the FHA now requires servicers to absorb 20% of the eventual loss if a loan misses two payments in the first two years.

“Lenders have added additional filters to their underwriting process to weed out homebuyers who might quickly go into forbearance on their new mortgage and trigger this penalty,” the Urban Institute research paper stated. “We estimate that this will result in a minimum of 1% fewer purchase loans and 5% fewer refinance loans. Applying these estimates to publicly available industry forecasts of 2020 originations implies that the new penalties will limit homeownership and refinancing opportunities for approximately 255,000 creditworthy borrowers.”

But while many borrowers will be impacted, the Urban Institute predicted the “maximum income the government could derive from this penalty is $53.4 million,” with the GSEs reaping up to $48 million for 2,400 early-forbearing loans and the FHA profiting by up to $5.4 million for 1,350 early-forbearing loans.

The research paper argued it was “not worth the loss of mortgage access for more than 200,000 borrowers. Eliminating the penalties for selling loans made in good faith that subsequently go into forbearance before sale to the FHA or the GSEs would open access to credit for as many as 255,000 borrowers at a low cost. To eliminate the potential for abuse, the FHA and the GSEs would need to make sure that loans sitting in a portfolio for months are not sold after they go into forbearance. This can be accomplished by eliminating the penalty for loans in forbearance only if they are sold no more than one month after closing.

The paper was co-authored by Laurie Goodman, VP at the Urban Institute and Co-Director of its Housing Finance Policy Center, and Michael Neal, Senior Research Associate in the Housing Finance Policy Center.

About Author: Phil Hall

Phil Hall is a former United Nations-based reporter for Fairchild Broadcast News, the author of nine books, the host of the award-winning SoundCloud podcast "The Online Movie Show," co-host of the award-winning WAPJ-FM talk show "Nutmeg Chatter" and a writer with credits in The New York Times, New York Daily News, Hartford Courant, Wired, The Hill's Congress Blog and Profit Confidential. His real estate finance writing has been published in the ABA Banking Journal, Secondary Marketing Executive, Servicing Management, MortgageOrb, Progress in Lending, National Mortgage Professional, Mortgage Professional America, Canadian Mortgage Professional, Mortgage Professional News, Mortgage Broker News and HousingWire.

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