FHA finalizes payment-supplement partial claim

The Federal Housing Administration has launched the final version of a long-awaited program for distressed borrowers trying to modify loans it insures in a higher-rate environment.

The payment-supplement partial claim option will become available for use in May and must be implemented by Jan. 1 of next year, according to a mortgagee letter the FHA released Wednesday.

The program, which has been redrafted twice, will allow borrowers to get additional payment relief for a three-year period via a mechanism through which amounts beyond arrearages are held in a custodial account and paid back to principal and interest.

"We know that everybody's been seeing default rates creep up and this is a brand new tool that should really help," Commissioner Julia Gordon told attendees during a government panel at the Mortgage Bankers Association's national servicing conference. 

MBA President and CEO Bob Broeksmit was largely supportive of the move and appreciated that it was in line with the group's recommendations for a "longer implementation period of January 2025" and an extension of COVID-19 recovery options beyond that date.

Ingrid Ripley, executive director of the single-family housing guaranteed loan program for the U.S. Department of Agriculture Rural Housing Service, said her agency would be "pretty much carbon copying" the FHA's program.

The strategy is emblematic of broader efforts in government servicing to recognize and address the concerns that emerge when rates rise as they have recently, said Sam Valverde, principal executive vice president of Ginnie Mae, a mortgage securitization guarantor.

"We learned the current tools don't work as well in a high-rate environment," he said, noting that this is an issue that Ginnie is continuing to work on multiple reforms to address in both the traditional and reverse mortgage markets.

In addition to such workouts, the Department of Veterans Affairs is close to addressing the need for a successor to the pandemic-era VA partial claim.

The program's end led to a call for servicers to observe a temporary foreclosure suspension for these loans until the new program could be put in place, with servicers generally directed to check in with the agency for guidance when borrowers are on that path.

The VA discontinued the partial claim in October 2022. Its Executive Director John Bell told attendees at MBA Servicing 2023 that there were budgetary considerations involved. Its successor, the VA Servicing Purchase program, is more cost-effective and close to getting final approval, Bell said Wednesday. The VA also has several other foreclosure prevention tools available to borrowers.

"We're still moving forward, we're still working to get our program out for veterans," he said.

VASP aims to streamline a routine process the department uses to modify delinquent loans purchased out of guaranteed pool, Bell said in Congressional testimony before a House subcommittee last week. He confirmed those details Wednesday.

"This was a no-cost to the government program. We thought that it was a very good option for us to move forward with," he said. "We're not against the partial claim. The partial claim certainly belongs in the waterfall somewhere."

But the VA would have to address several challenges to bring the partial claim back now that extend beyond cost to some operational management concerns that arose when it ran the program, and limits to the agency's authorization, Bell said.

The budget impasse in Congress has been an additional challenge for government mortgage agencies trying to get programs set up, Gordon said.

"We are making do with last year's money for this year's expenses. That is a problem," she said.