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The FHA clarifies post-forbearance underwriting

| September 11, 2020

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.

The Federal Housing Administration has clarified the requirements for underwriting a new FHA loan when the borrower had previously been in an FHA forbearance plan. Investors had been concerned that a borrower might be able to get a streamlined refinance immediately after exiting forbearance, letting the lender capture some of the price premium of these loans without doing a buyout. A lender can sell a refinance loan into a new TBA pool immediately, while a delinquent loan that is bought out and reperforms must wait at least six months after buyout and is ineligible for a TBA pool. The FHA now requires most loans to make at least three consecutive payments following forbearance before qualifying for a refinance, which is like conventional MBS.

The most direct way to capture the price premium of a delinquent loans is to buy out the loan at par, cure it, and re-pool into the same coupon at a steep premium. However, in late June Ginnie Mae restricted the re-pooling of these loans, severely reducing the economics for lenders, especially non-banks. Some banks continue to buyout delinquent loans, but most non-banks have yet to find a way to finance the buyouts. A refinance might have provided lenders an alternate way to capture some of the premium.

One refinance, called the “credit qualifying streamline refinance”, is permitted within the first three months following forbearance. On the surface this appears to provide a way for lenders to combine the FHA’s delinquent payment deferral program (partial claim) and a refinance, making money for the lender and lowering payments for the borrower.

A conversation with Ginnie Mae suggests the agency feels this is difficult for the lender to do. The agency pointed to a few challenges:

  • The credit qualifying streamline refinance requires manual approval by the FHA.
  • Lenders are unable to use their direct endorsement authority for these loans; the FHA must manually approve each loan.
  • These refinances require a full credit report, which might put the lender at risk of future CFPB enforcement actions if the credit report is deemed unnecessary.
  • It is difficult to combine a refinance with a partial claim, since it can take up to 60 days for the lender to receive completed partial claim paperwork. The loan cannot be refinanced until the lender receives the final documents.
  • Time spent in forbearance will not count towards satisfying Ginnie Mae’s 6-month seasoning requirements for repooling loans.

Therefore, it seems unlikely that lenders will be able to broadly target borrowers that qualify for a partial claim with an offer to refinance. However, once borrowers pass the minimum post-forbearance seasoning requirement they will become as refinanceable as comparable FHA loans that did not use forbearance. The borrower does not need to repay any deferred payment amount during a refinance, the FHA will resubordinate that lien to the new loan.

A few loan types require more than three consecutive payments following forbearance. Modified loans must make six payments on their modified loan, and cash-out refinances require 12 consecutive payments post-forbearance.

Exhibit 1: Requirements for new FHA loans post-forbearance

Source: FHA, Amherst Pierpont Securities

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