The Federal Housing Administration (FHA) has announced a new loss mitigation program, offering borrowers temporarily reduced monthly mortgage payments without changing their interest rates.
Called the Payment Supplement, the option allows mortgage servicers to decrease a borrower’s mortgage payment by using funds from a “partial claim” — an interest-free second lien from the U.S. Department of Housing and Urban Development (HUD) to help homeowners catch up on their past due payments and get back to good standing. The partial claim, which would be for up to 30% of the outstanding balance of a borrower’s FHA loan, would be paid back when the homeowner sells the home, refinances or otherwise terminates the mortgage.
Funds from the partial claim would first be used to pay any overdue payments on the original mortgage. Any remaining funds in the partial claim would then be deposited in an FHA custodial account managed by the mortgage servicer, who would use those funds to temporarily supplement the monthly payments the borrower would make.
The goal, according to the FHA, is to reduce the borrower’s monthly principal and interest (P&I) payments by 25% for as long as the partial claim payment supplement is active. Per a mortgagee letter from HUD released on Wednesday, payment supplements will be active for a period of three years, after which the borrower resumes responsibility for paying the full monthly P&I amount.
“HUD uses every tool in our toolkit to ensure we can help struggling borrowers avoid foreclosure,” said HUD Secretary Marcia L. Fudge. “Today’s new policy will enable the families we serve to get back on their feet while staying in their homes.”
The rapid rise of interest rates for more than a year provided the impetus for the new program, according to FHA Commissioner Julia Gordon. The program was first discussed and publicized last spring, coming to fruition after a lengthy review process.
“FHA developed this innovative tool because after interest rates rose, the FHA Recovery Modification could no longer reliably provide payment reduction to borrowers facing a hardship,” she said. “Payment Supplement will bring borrowers current and temporarily reduce their monthly payments for up to three years, which we hope will enable them to weather their hardship and once again begin making their full mortgage payments.”
Servicers may begin implementing the Payment Supplement option on May 1, but must implement the solution for all eligible borrowers by Jan. 1, 2025.
The new plan has drawn praise from industry stakeholders, including Scott Olson, executive director of the Community Home Lenders of America (CHLA). The CHLA has long advocated for a similar program, sending a letter to the FHA requesting one in August 2022.
“CHLA applauds FHA Commissioner Gordon for instituting a new payment supplement partial claim,” Olson said. “This will help struggling homeowners who are behind on their mortgage payments to stay in their homes.”
“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,” said Bob Broeksmit, president and CEO of the Mortgage Bankers Association. “As recommended, a longer implementation period of January 2025 … will further support servicers’ implementation efforts.”
