FHA Establishes New, Streamlined COVID-19 Recovery Loss Mitigation Options

The Federal Housing Administration on Friday published Mortgagee Letter 2021-18, COVID-19 Recovery Loss Mitigation Options. The ML outlines assistance for homeowners who have been financially impacted by the COVID-19 pandemic to remain in their homes with new, streamlined loss mitigation options.

ML 2021-18 amends FHA’s COVID-19 Loss Mitigation policies for borrowers with FHA-insured forward mortgages, as found in Section III.A.2.o., Presidentially-Declared COVID-19 National Emergency, of the Single Family Housing Policy Handbook 4000.1 (Handbook 4000.1). It establishes the COVID-19 Recovery Loss Mitigation Options (COVID-19 Recovery Options) “waterfall” that streamlines and revises FHA’s previous options for struggling homeowners, reduces documentation requirements, and provides greater payment reduction options for eligible homeowners with FHA-insured Single Family Title II forward mortgages.

The simplified COVID-19 Recovery waterfall allows mortgage servicers to offer eligible homeowners who cannot resume making their mortgage payments a reduction in the principal and interest portion of their monthly payments. HUD Secretary Marcia Fudge said the changes announced Friday will provide those most in danger of losing their homes a “path to deep and sustained recovery, including lower income individuals, families of color, and young, first-time homeowners who have disproportionately suffered economic hardships due to the pandemic.”

For homeowners who can resume making their existing monthly mortgage payments, FHA has established a revised COVID-19 Recovery Standalone Partial Claim.

Additionally, FHA reinforced that the Biden Administration’s American Rescue Plan Homeowner Assistance Funds, administered by the Treasury Department, can be used in connection with FHA-insured mortgages or subordinate mortgages as permitted by the jurisdiction’s HAF program and other requirements.

“As Americans get back to work and our economy continues to recover, we are taking targeted steps to make sure homeowners impacted financially by COVID-19 have the support they need to remain in their homes,” Fudge said. “Housing affordability is at its worst and losing your home now would devastate households. These options for FHA borrowers will ensure equitable relief and recovery to people who need it most.”

New COVID-19 Recovery Waterfall

The new FHA COVID-19 Recovery waterfall streamlines and revises FHA’s previous options for struggling homeowners, reduces required documentation, and allows mortgage servicers to provide greater payment reduction for eligible homeowners with FHA-insured Single Family Title II forward mortgages. The two-step waterfall options intended for properties that are occupied as the homeowner’s primary residence are:

1. COVID-19 Recovery Standalone Partial Claim: for homeowners who can resume making their current mortgage payments, the COVID-19 Recovery Standalone Partial Claim allows mortgage payment arrearages to be placed in a zero interest subordinate lien against the property that is repaid when the mortgage terminates, usually when the homeowner refinances or sells the home.
2. COVID-19 Recovery Modification: for homeowners who cannot resume making their current monthly mortgage payments, the COVID-19 Recovery Modification extends the term of the mortgage to 360 months at a fixed rate and targets reducing the borrower’s monthly principal and interest portion of their monthly mortgage payment. The COVID-19 Recovery Modification must include a Partial Claim if the homeowner has Partial Claim funds available.

For properties that are not occupied by the owner, mortgage servicers must offer eligible homeowners FHA’s COVID-19 Recovery Non-Occupant Loan Modification, which extends the term of the mortgage to 360 months, or less if requested by the homeowner, at a fixed interest rate.

“This…is a significant and meaningful way to help those homeowners who will be at a critical point in their recovery in the coming months and transitioning out of forbearance to permanent sustainable payments,” said FHA Principal Deputy Assistant Secretary Lopa Kolluri. “We can help more homeowners who, through no fault of their own, continue to feel the financially impacts of the pandemic and are unable to make their previous mortgage payment amount. Deeper payment reduction is greatly needed for many of these homeowners to stay in their homes.

COVID-19 Recovery Waterfall Implementation and Homeowner Assessments

Servicers may begin offering the new COVID-19 Recovery waterfall as soon as operationally feasible but must begin using the new waterfall for eligible homeowners within 90 days. In addition, servicers must re-review homeowners for the new COVID-19 Recovery options in circumstances where an existing home retention option has not been completed, where the homeowner was previously ineligible for a COVID-19 home retention option, or if the homeowner has re-defaulted after a COVID-19 home retention option.

“FHA and mortgage servicers have a shared goal of helping as many homeowners as possible to return to sustainable homeownership, and the FHA team will continue to monitor closely the performance of our loss mitigation options to ensure that our policies successfully meet the needs of homeowners impacted by COVID-19,” said FHA Deputy Assistant Secretary for Single-Family Housing Julienne Joseph.

The COVID-19 Advance Loan Modification

The changes announced today work in tandem with the pre-waterfall FHA COVID-19 Advance Loan Modification (COVID-19 ALM) announced on June 25. The COVID-19 ALM requires mortgage servicers to review their FHA mortgage servicing portfolio and offer the COVID-19 ALM to eligible homeowners. Homeowners who choose to accept the COVID-19 ALM need to only review and sign and return the mortgage modification documents sent to them by their mortgage servicer.

FHA said it urges those who are behind on their mortgage payments or are having difficulty complying with the terms of their reverse mortgage or Home Equity Conversion Mortgage, and have not yet contacted their mortgage servicer, to do so immediately. By contacting their servicer, homeowners can obtain a mortgage payment forbearance or a HECM extension. For FHA forward mortgages, FHA said it urges homeowners to engage with their mortgage servicer when their mortgage servicer contacts them about the new COVID-19 ALM or how to bring their mortgage current. Homeowners who are seeking more information on the options available to them should also consider contacting a HUD-approved housing counseling agency.