FHA, CFPB Issue New Guidance on Forbearance

The Federal Housing Administration and the Consumer Financial Protection Bureau announced new policies to assist mortgage borrowers impacted by the economic effects of the coronavirus pandemic.

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 is designed ensure that 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.

HUD Secretary Ben Carson said the 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.” He said the 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.

 “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,” Carson said.

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.

“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,” said HUD Deputy Secretary Brian Montgomery.

“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,” said Acting Federal Housing Commissioner Len Wolfson.”

Meanwhile, the Consumer Financial Protection Bureau and the Conference of State Bank Supervisors issued joint guidance to mortgage servicers to assist in complying with CARES Act provisions granting a right to forbearance to consumers impacted by the COVID-19 pandemic.

Under the joint guidance (https://files.consumerfinance.gov/f/documents/cfpb_csbs_industry-forbearance-guide_2020-06.pdf), servicers of federally backed mortgages, such as Fannie Mae or Freddie Mac, HUD, Department of Veterans Affairs or Department of Agriculture loans must grant forbearance to borrowers with pandemic-related hardships that may last as long as two consecutive 180-day periods. Furthermore, additional interest, fees or penalties beyond the amounts scheduled or calculated should be waived with no negative impact to the borrower’s mortgage contract during the forbearance.

“Mortgage servicers could violate the CARES Act or other applicable law and potentially cause consumer harm if they were to require documentation from borrowers to prove financial hardship, if they did not grant the forbearance once properly requested, or if they steered borrowers away from forbearance or misled them,” the agencies said in a news release.

Last month, the Bureau and CSBS released a consumer guide to their relief options, which be accessed at https://www.consumerfinance.gov/about-us/newsroom/cfpb-csbs-consumer-guide-mortgage-relief-options/