FHA issues QC waiver for some wildfire-related defaults

The Federal Housing Administration issued a waiver on quality-control reviews for some newly distressed mortgages in Southern California, as homeowners continue to recover from January's destructive wildfires.

The FHA mandates reviews after recently originated mortgages become 60 days past due and were taken out in the prior six months. Lenders and servicers are required to examine such early payment defaults to determine that underwriting at the time of origination was in compliance with all FHA single-family rules.  

QC reviews will be waived for mortgages collateralized by homes located in Los Angeles County, which was designated as a federal major disaster area due to the fires. Eligible loans will have a closing date before the incident start date Jan. 7, 2025, with borrowers hitting the 60-day EPD mark between Feb. 1 and July 31.

The Department of Housing and Urban Development, which oversees FHA, said it anticipated a rise in the number of early payment defaults this year. 

"For mortgages that closed prior to the incident period and became EPDs in the months after, defaults are likely to be the result of loss of employment/income, property damage, forced relocation and other factors unrelated to noncompliance with FHA single-family origination and underwriting requirements," HUD noted in the waiver request. 

The latest FHA announcement comes after the agency recently extended its initial ban on foreclosures of properties within the disaster zone. The moratorium, which was introduced immediately after the wildfires erupted, was scheduled to end on April 7 but now expires on July 6.

Reports published since the disaster show signs of possible distress emerging, with a shrinking share of borrowers in Southern California making their payments in the first days of the multiweek event in January, ICE Mortgage Technology said. Although not exclusively related to the fires, ICE also recently found that FHA borrowers account for much of the growth of delinquencies over the past year. 

The fast-moving series of fires first struck the Los Angeles area on Jan. 7, with fierce winds carrying sparks and allowing the disaster to quickly spread. Early estimates of insurable losses from damages ranged between $35 billion to $45 billion, according to real estate data provider Cotality. At least 29 confirmed deaths resulted from the disaster, Los Angeles medical officials also said.

The two largest blazes, the Eaton and Palisades wildfires, burned a combined 37,400 acres, California's Department of Forestry and Fire Protection said.  

The destruction resulting from the wildfires also led to a series of relief measures from California officials in addition to federal assistance.  A proposed state bill would offer up to 360 days of mortgage-payment forbearance. A separate agreement from Gov. Gavin Newsom and several lenders located in the state allowed for a 90-day forbearance period.

Newsom also issued various executive orders that would relax permitting on construction and punish land speculators for taking advantage of local residents.