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Interest-free loans aid FHA-backed borrowers behind on their mortgage

The Federal Housing Administration insures about 15% of

The Federal Housing Administration insures about 15% of mortgages; pictured, a Nassau County neighborhood in March.  Credit: Newsday/John Keating

Homeowners with Federal Housing Administration-backed mortgages can get a new form of relief if they are suffering financial hardships due to the coronavirus pandemic, a federal official said Tuesday.

Borrowers who request mortgage forbearance — or temporary relief — on their FHA-backed loans can convert the missed payments into interest-free loans that will be due when they sell their home, refinance their mortgage or reach the end of their loan term, a senior official with the federal Department of Housing and Urban Development said in a  statement.

The new program, called the COVID-19 Standalone Partial Claim, “is the best option for the majority of borrowers who obtain forbearance, and the one that is likely to be the most successful in helping them” to avoid further problems, the official said.

The new interest-free loan program “is a very fair repayment plan” for borrowers, Peter Elkowitz, chief executive of the Long Island Housing Partnership in Hauppauge, said Tuesday. “It’s not asking them for an immediate payment.”

Elkowitz recommended homeowners meet with a federally certified housing counselor to research their options. 

David Hernandez who lives with his wife and their 17-year-old son in Floral Park, said the new program "would absolutely be helpful and more realistic" than making a lump-sum payment in a few months. Hernandez, who has an FHA-backed loan, teaches physical education, coaches sports in an after-school program, works at a summer camp and drives for a ride-sharing service.

FHA insures about 15% of mortgages, offering loans with down payments as low as 3.5%, said Guy Cecala, publisher of Inside Mortgage Finance.

The new FHA program was the latest piece of encouraging news for homeowners with federally backed loans who are struggling to make mortgage payments.

Under the $2.2 trillion Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, homeowners with federally backed loans can receive six months of mortgage forbearance, plus a six-month extension, if the pandemic is causing financial hardship.

About two-thirds of mortgage borrowers have federally backed loans, Cecala said. 

Some Long Island borrowers with federally backed loans said last month that when they spoke with their lenders, they were told they would need to make up the missed payments in a lump sum within a few months.

However, federal officials have said recently that lenders cannot require repayment so soon. 

A spokesman for the Federal Housing Finance Agency said that for loans backed by Fannie Mae and Freddie Mac, borrowers must be offered additional options such as repayment plans or moving missed payments to the end of the loan term. The Department of Veterans Affairs has said such options also are available for borrowers with VA-backed loans.

Rep. Kathleen Rice (D-Garden City) said she is advocating for similar assistance to be offered to all mortgage borrowers — not just those with federally backed loans — in a future stimulus package.

“There's financial strain on everyone, regardless of who holds their mortgage,” she said.

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