MBA, Trade Groups Urge HUD to Modify FHA Forbearance Indemnification Policy

Sixteen industry trade organizations joined the Mortgage Bankers Association in a letter this week to HUD, expressing concerns with a recently announced FHA policy requiring lenders to provide 20 percent indemnification of the original loan amount for up to two years in relation to borrowers who enter into forbearance due to COVID19-related hardship after closing and prior to FHA insuring their loan.

The letter to HUD Secretary Ben Carson asks HUD to revise Mortgagee Letter 2020-16 ( and its “excessive” indemnification requirements and commit that it will insure all otherwise-eligible loans that enter into forbearance shortly after closing without any indemnification requirements or other restrictions.

“While we understand FHA’s desire to limit risk and exposure during uncertain times, we believe the resulting burden on the lender will have the effect of severely limiting access to FHA-insured loans for homebuyers,” the letter said.

According to the latest MBA Forbearance and Call Center Report, as of May 31 8.53% of mortgage loans in the U.S. are in forbearance.

The letter noted FHA’s historic role is to provide access to mortgage financing to a broad range of borrowers, a role that is particularly critical when access to private credit is restricted. “The current health and economic crisis is exactly the type of period during which FHA-insured financing is most necessary to keep the housing market operating smoothly and Americans sheltered,” it said. “The excessive indemnification requirements in ML 2020-16 will effectively force lenders to impose higher credit and financial overlays to protect against risks that they cannot control during the underwriting process. We have seen a similar response to the GSEs’ recent policy to charge steep loan level price adjustments, and to stop purchasing certain refinance loans altogether, if a borrower seeks forbearance after closing but prior to delivery.” 

Additionally, the letter said these overlays “will severely limit access to FHA-insured financing for the borrowers who need it the most, disproportionately impacting low- and moderate-income families, first-time homebuyers and borrowers of color. By insuring loans that enter into forbearance due to COVID-19-related hardship shortly after closing without penalties or further restrictions, FHA can promote access to credit while actively working to mitigate the harmful economic and financial impacts of the virus.”

Indemnification, the letter said, “is a tool for FHA to address underwriting and eligibility errors, not to avoid the risks of adverse market conditions.”