The U.S. Department of Housing and Urban Development (HUD) on Wednesday issued a mortgagee letter that implements the Federal Housing Administration’s (FHA) payment supplement partial claim.
The new loss-mitigation alternative resulted from the FHA’s acknowledgment that its toolkit wasn’t enough to support struggling borrowers as mortgage rates surged. Since March 2020, lenders and servicers have provided borrowers with nearly 1.9 million COVID-19 loss-mitigation actions.
The letter states that the option will be implemented starting May 1, 2024, but will be mandatory on Jan. 1, 2025.
“This is a brand-new innovation in loss mitigation, and it’s designed to address what every servicer is seeing, which is that the FHA recovery mod does not work so well when a borrower comes in with a mortgage rate that’s significantly lower than prevailing rates,” FHA Commissioner Julia Gordon said during the Mortgage Bankers Association’s (MBA) Servicing Solutions Conference & Expo in Orlando.
Gordon also announced that the FHA is extending the current temporary waterfall into 2025. According to the mortgagee letter, the COVID-19 recovery options will be available through April 30, 2025.
Regarding other initiatives, Gordon said the FHA is “also hoping soon to put out our servicing defect taxonomy” and, in the near future, will be releasing a mortgagee letter for the 203(k) renovation loan program.
The new option
Partial claims are interest-free loans from HUD that borrowers use to make their payments current, with the remainder of the late payments added to the principal and extended for 30 years.
The new payment supplement combines the standalone partial claim, which brings the loan current, and uses the remainder as a new monthly principal reduction payment for three years. During this period, the mortgage will not be modified, facilitating the sale to Ginnie Mae.
After the payment supplement period ends, however, the borrower will be responsible for resuming payment of the full monthly principal and interest amount.
“It’s going to be a three-year program enabling borrowers to get back on their feet under whatever hardship they have to handle. If they stay in their home at the end of those three years, they will resume their full mortgage payment,” Gordon said. “It is part of the partial claim, so that [the partial claim] is paid off at the time of regular partial payments, when the borrower sells or refinances, or the mortgage terminates.”
The letter states that HUD intends to make the payment supplement a permanent part of FHA’s loss-mitigation options. It also acknowledges that resuming full payment may be a shock to borrowers and is “an issue that will be assessed on an ongoing basis as borrowers begin to reach the end of the payment supplement.”
“Prioritizing payment relief and reducing operational complexities were imperative, and we believe the improvements made following multiple rounds of feedback will ensure mortgage servicers have a new effective and efficient way to help struggling borrowers stay in their homes,” MBA President and CEO Bob Broeksmit said in a statement.
“As recommended, a longer implementation period of January 2025 and extending the sunset date of the COVID-19 Recovery Options beyond that date will further support servicers’ implementation efforts.”
The payment supplement provides mortgage servicers with an additional tool to temporarily reduce a borrower’s monthly loan payment by up to 25% without modifying their current interest rate.
When implemented, the payment supplement will allow servicers to temporarily reduce a borrower’s payment by using funds from a partial claim, which enables the borrower to access up to 30% of the outstanding balance of their FHA-insured mortgage.
