Temporary policy provides FHA insurance safeguards for borrowers and lenders
Today, the Federal Housing Administration (FHA) announced a new, temporary policy that provides guidance for lenders to obtain FHA insurance endorsements on mortgages where the borrower has requested or obtained a COVID-19 forbearance. This policy will ensure that the safeguards of the FHA program continue to work for new homeowners facing a 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.
FHA’s temporary policy recognizes that there are borrowers who met all FHA requirements for a mortgage at the time of closing but were adversely affected by the COVID-19 pandemic before FHA was able to endorse the loan for insurance. This policy will also help lenders, particularly small and mid-sized community-based lenders, 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 HUD Secretary Ben Carson. “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.”
FHA will require lenders to provide an indemnification agreement to FHA for 20 percent 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 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. FHA will not require upfront payments by lenders or a change to FHA mortgage insurance premiums for these mortgages.
“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.”
“Today’s action by FHA ensures borrowers continue to have access to affordable mortgage financing, while managing future risk to the Mutual Mortgage Insurance Fund as well as our responsibility to the American taxpayer,” said Acting Federal Housing Commissioner Len Wolfson. “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.”