15 June, 2020
Published June 15, 2020
Loans that were originated according to FHA guidelines – that went into forbearance before they were able to be move them over to FHA – are now able to be insured by the FHA. There are, of course, some restrictions and stipulations that are associated with this, though it can potentially move loans in forbearance off of a lender’s books much sooner (or at more reasonable terms) than would have previously been possible.
The Department of Housing and Urban Development (HUD) announced on June 4, 2020 that they will start to allow loans that were closed under FHA guidelines and entered into forbearance prior to FHA endorsement to be endorsed as FHA loans starting on June 15, 2020. This is a major change that is potentially very important for originators of FHA loans as prior to this letter, if a loan entered forbearance prior to being endorsed by HUD as an FHA loan, it would be ineligible for that endorsement.
In order to be eligible, the loan must fulfill the following criteria:
- The borrower has requested, or the mortgage is subject to, a forbearance agreement for one or more payments due to relief provided to borrowers impacted by COVID-19.
- At the time the forbearance was initiated, the mortgage was current.
- At the time of mortgage closing, the mortgage satisfied all requirements for FHA insurance.
- The Mortgagee (lender) executes a two-year partial indemnification agreement.
- Additionally, the forbearance provided to borrowers experiencing financial hardship due, directly or indirectly to COVID-19, is not considered the provision of funds by a mortgagee to bring and/or keep the mortgage current or to provide the appearance of an acceptable payment history.
The bright side is that originators will be able to move these loans off of their books at a reasonable rate. If the economy recovers and people are able to move out of forbearance and resume paying their mortgages, then this is very beneficial.1 However, the partial indemnification agreement states that if the loan goes delinquent (triggering an FHA insurance claim), then the mortgagee would be responsible for reimbursing HUD for a partial indemnification amount equal to 20% of the initial loan amount. This is obviously a HUGE risk, possibly riskier than taking a whole loan through foreclosure and liquidating the real estate asset. Therefore, the usefulness of this program will likely be limited to those lenders who do not have the capacity to hold whole loans in portfolio (as a business model). For those lenders, it will provide some immediate liquidity and hopefully, the downside risk associated with the transactions will never be realized, but it must be accounted for.
Loans in forbearance that were originated to FHA standards were previously ineligible for endorsement by FHA, so they would have been stuck in limbo on the balance sheet of the originator. For many, this will be a welcome move and something that will benefit their business a great deal in the short run. However, they must remain cognizant of the risk involved with the partial indemnification agreement and the probability of default in these uncertain times. The MBA addressed this risk in a letter to HUD as well.
If your company does take advantage of this program, it would be a good idea to account for some losses due to the partial indemnification agreements starting immediately, and adequately prepare and capitalize for potential losses.
If you have questions related to this article, please do not hesitate to contact Optimal Blue.
Sources & References
| [1] | Beneficial for liquidity purposes. If the borrowers are making the payments on the loans then it likely would be a decent asset to hold as well, just not something in the business model. |