Housing sector leaders acknowledge that some borrowers are still struggling to pay their mortgages after being hit by layoffs and other issues caused by the Covid-19 pandemic. In addition, many borrowers’ financials have since been further impacted by events such as natural disasters, rising inflation or job loss. That’s why industry leaders are working on new solutions to the loss mitigation toolkit, including successors for the Covid-19 partial claim options.
And this time, they also have to consider the surging mortgage rates landscape.
“We know that the loan modification as we know at the Covid recovery model, every other type of loan modification, relies on a rate and term. And we are in a situation right now where the rate is not helping us,” Julia Gordon, the Federal Housing Administration (FHA) Commissioner, said this week during the Mortgage Bankers Association (MBA) Servicing Conference in Orlando.
In January, the FHA announced changes to its Covid-19 loss mitigation toolkit. It will be available to all eligible borrowers 18 months past the mandatory effective date of April 30, regardless of their hardship reasons. Among other initiatives, the FHA raised the maximum partial claim amount from 25% of the mortgage‘s unpaid principal balance to the maximum 30% allowed by statute.
Gordon said, however, that the agency is “not done yet.” The FHA is developing a solution where borrowers can put the partial claim resources into a reserve account and supplement mortgage payments over time.
A partial claim works like an interest-free loan that borrowers can use to make their mortgage current. The money is repaid after the last mortgage payment when the loan is refinanced or the property is sold. The proposal is to use the loan to reduce borrowers’ monthly payments.
“So, we can get borrowers with payment reductions – that we know works,” Gordon said. “When we look at our own internal data, and when we look across at industry data, we know that the more payment reduction you have, the less likely you are to redefault, or more likely you are to be successful and stay in that home.”
The FHA expects to submit to the public a request for information regarding the partial claim new option “within the next few weeks,” according to Gordon.
The VA loss mitigation waterfall
The Department of Veteran Affairs (VA) also recognizes the relevance of the partial claim program and is studying ways to add an alternative to its loss mitigation toolkit.
“We certainly realize that partial claims are a great program. Certainly, those options need to be available for borrowers,” John E Bell III, executive director at the VA,, said during the conference.
According to Bell, the VA is looking at this “from a different angle” to deliver it to borrowers.
The VA partial claim program, intended to assist veteran borrowers impacted by the Covid-19 pandemic, was available from July 27, 2021 to October 28, 2022.
“The program was released so quickly that there were implementation pains,” Rita M. Falcioni, chief of Loan Management at the VA, said during the conference. Falcione said “we have been really working to get the backlog down.”
According to Falcioni, the program was temporary and the agency had no authority or funding to make it permanent, but the feedback has been that the industry wants a permanent program.
Injecting liquidity into the system
Ginnie Mae plans to provide more liquidity to the system to combat the rising interest rate landscape, according to its president, Alanna McCargo.
“No one expected that we’d come out from a pandemic event and we would be on this huge inflationary high-interest rate. And they all happen fast. It was like bam, overnight, rates were up,” McCargo said. “It is a critical time to make sure that the support is there for the liquidity that the system needs,”
According to McCargo, Ginnie Mae plans to provide something like the Pass-Through Assistance Program (PTAP) that was available during the pandemic. The assistance program helped issuers meet their principal and interest pass-through obligations to investors. Issuers requested funds monthly to assist with the temporary financial impacts of Covid-19.
“We did turn out that because of monetary policy and interest rates being brought down to the lowest levels we ever saw at the beginning of the pandemic,” McCargo said.
McCargo added: “Now, we don’t have a monetary policy driving interest rates down, and we all know that. So it’s a really important time, as we look at now going forward, that we have on the shelf opportunities like the PTAP or other advanced solutions. And we are looking really hard at how we would deploy something like that again.”
