The U.S. Department of Housing & Urban Development (HUD), and the Federal Housing Administration (FHA), has announced two actions that increase homeownership affordability and enhance clarity and transparency for mortgage servicers in its Single-Family program.
First, FHA is providing greater underwriting flexibility for borrowers who rent space inside their homes to qualify for affordable FHA-insured mortgage financing.
Second, FHA recently completed its Single-Family Defect Taxonomy used for Title II mortgage program servicing loan reviews. The Servicing Defect Taxonomy provides greater transparency regarding the servicing loan review process, especially around FHA’s assessment of the severity of errors or non-compliance with its mortgage servicing policies and the actions FHA may take in instances of servicer error or non-compliance.
“The actions we’re announcing today complement our work over the last four years to increase access to affordable homeownership and to increase transparency in our policy and operational processes,” said Federal Housing Commissioner Julia Gordon. “Both actions are the direct result of ongoing consultation and dialogue with industry participants, consumer advocacy groups, and others as we worked to develop policies that work for homebuyers, lenders, servicers, and FHA.”
Rental income from roommates or long-term lodgers is a stable and viable source of income that increases housing affordability and allows many borrowers to manage housing costs. Specifically, FHA’s newly revised underwriting guidance will allow rental income from individuals renting space inside a borrower’s home to be included as part of FHA qualification when the borrower has 12 months of history of receiving this income. In addition, FHA is expanding the types of acceptable income verification documentation.
“Supporting growth in affordable homeownership and collaborating with private partners such as mortgage servicers are both crucial components of HUD’s vital mission,” said HUD Agency Head Adrianne Todman. “The increased flexibilities announced today for FHA-insured mortgages will help more people gain and maintain homeownership. And the increased mortgage servicing transparency will allow our partners to more effectively use our programs to expand sustainable homeownership nationwide.”
Issuing the Servicing Defect Taxonomy follows the implementation in 2017 of the Origination Defect Taxonomy, which has proven to be a crucial resource for FHA and lenders. The Servicing Defect Taxonomy provides a framework for consistent FHA policy enforcement while allowing some flexibility for nuanced loan-level scenarios. Remedies for certain violations illustrated in the taxonomy can include corrective actions by the servicer or, if corrective actions are not possible, one- or five-year indemnification rather than life-of-loan indemnification. Because it would be impossible for the Taxonomy to include a definitive list of all possible servicing violations, it was constructed to allow flexibility that can also cover unanticipated scenarios. FHA will continue to use loan review data to identify patterns of non-compliance for various quality assurance and risk management processes.
“Today we’ve made it easier to for more borrowers to qualify for an FHA-insured mortgage, and for mortgage servicers to understand our mortgage servicing loan review process and error severity assessments,” said HUD Deputy Assistant Secretary for Single-Family Housing Sarah Edelman. “These changes are emblematic of the holistic approach we’ve taken under this Administration to enhance the FHA program from mortgage origination to mortgage servicing and loss mitigation.”
