The Federal Housing Administration (FHA) submitted for public comment on Wednesday its proposal to create a new partial claim option, a result of its acknowledgment that its current loss mitigation toolkit isn’t enough to support struggling borrowers as rates surge.
The Payment Supplement Partial Claim will allow servicers to use the FHA partial claim to bring a borrower’s home loan current and temporarily reduce their monthly payments for a period of three to five years. Trade groups, servicers and industry experts support the initiative.
HousingWire reported in February that housing leaders were working on successors for Covid-19 partial claims. The deadline for feedback on the single-family policy drafting table is June 30, 2023.
A partial claim is an interest-free loan from the U.S. Department of Housing and Urban Development (HUD) that borrowers can use to make their mortgage current. The remainder of the late payments are then added to the principal balance and extended for 30 years at a fixed rate.
However, the FHA’s proposal allows borrowers to keep their existing interest rate and reduce their monthly payments temporarily by using funds from the partial claim, which comes from the FHA mortgage premium. Homeowners then pay the FHA back when they sell their homes or refinance their loans.
Just a few years after the start of the Covid-19 pandemic, borrowers are facing other hurdles, such as high inflation and increasing mortgage rates. Surging rates force borrowers in default to modify their loans at market rates that may be higher than their current rates, the FHA says.
“Many homeowners continue to experience hardships due to health or financial difficulties that occurred during the pandemic, and these challenges have been exacerbated for these and other borrowers by current economic uncertainties,” Julia Gordon, HUD’s assistant secretary for housing and the federal housing commissioner, said in a statement.
“When we saw that our existing loan modifications were no longer providing adequate payment relief, our team painstakingly explored every possible alternative to provide relief in the current rate environment, resulting in this innovative proposal,” Gordon added.
According to the draft proposal, mortgagees have provided over 1.3 million COVID-19 loss mitigation actions to borrowers since the start of the COVID-19 pandemic. On January 30, HUD extended and expanded its loss mitigation options.
In reaction to the new proposal, the Community Home Lenders of America (CHLA) explained that rising mortgage rates create problems for Ginnie Mae issuers carrying out loss mitigation for defaulted FHA borrowers.
Typically, issuers implement loss mitigation by buying an FHA loan out of a Ginnie Mae pool, modifying the loan, and then selling the loan back into a pool. However, Ginnie Mae issuers are facing an increase in mortgage rates that could make it challenging to carry out the loss mitigation or the re-sale of loans into Ginnie Mae pools at steep losses to the issuer.
“The skyrocketing of mortgage rates has undermined FHA’s main loss mitigation tool for helping distressed borrowers – and FHA’s nimbleness in finding a workaround for this will be greatly appreciated by distressed homeowners,” Scott Olson, CHLA’s executive director, said in a statement.