A recent Federal Housing Administration (FHA) policy will hamper access to FHA-insured loans during the COVID-19 crisis, CUNA and more than a dozen organizations wrote to Department of Housing and Urban Development leadership this week.

The FHA recently announced a policy requiring lenders to provide 20% indemnification (of the original loan amount) for up to two years in relation to borrowers that enter forbearance due to pandemic-related hardship after closing and prior to the FHA insuring the loan

“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 reads. “In the interest of maintaining a well-functioning housing market during this crisis, we urge FHA to revise Mortgagee Letter (ML) 2020-16 and commit that it will insure all otherwise-eligible loans that enter into forbearance shortly after closing without any indemnification requirements or other restrictions.”

The organizations believe that the excessive indemnification requirements in the mortgagee letter “will effectively force lenders to impose higher credit and financial overlays to protect against risks that they cannot control” during the underwriting process.

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