What You Need to Know About the FHA’s Payment Supplement: Vicki Vidal and Haris Jusic From ICE Mortgage Technology
Vicki Vidal is senior regulatory counsel, corporate compliance, for ICE Mortgage Technology.
Haris Jusic is the solution manager (VP) for ICE Mortgage Technology and is responsible for investor and agency reporting capabilities.
During the COVID-19 pandemic, when rates remained low, the FHA streamlined its home retention loss mitigation options and provided relief for nearly 1.9 million borrowers. Despite these efforts, the current climate of high mortgage interest rates poses challenges for initiating loan modifications.
To address this, the FHA introduced the Payment Supplement in Mortgagee Letter 2024-02 and related documents on February 21, 2024. Designed to help homeowners who are unable to achieve a sustainable monthly mortgage payment reduction under existing FHA loss mitigation programs, the Payment Supplement supports temporarily reducing the principal portion of the monthly mortgage payment for three years without modifying the mortgage.
The Payment Supplement is the last option in the home retention waterfall. Borrowers must have Partial Claim funds remaining to both cure the arrearage and fund the Monthly Payment Reduction for three years. Funds provided under the Payment Supplement are secured by a zero-interest bearing note and mortgage payable to HUD.
Mortgage servicers can begin implementing the Payment Supplement on May 1, 2024, with a deadline for full implementation by January 1, 2025. HUD will pay the servicer a $1,750 incentive fee through the claims process.
Furthermore, the FHA announced that it will extend its full suite of COVID-19 Recovery Loss Mitigation Options, including the Payment Supplement, through April 30, 2025.
This is Not a Loan Modification
Unlike a loan modification, the Payment Supplement does not alter the first lien mortgage terms, including the monthly principal and interest payments due. Instead, the FHA provides funds to temporarily cover part of the homeowner’s mortgage payment.
Because the servicer is not modifying an existing mortgage, it is not required to buy loans out of a Ginnie Mae-securitized pool to complete the Payment Supplement. Given that approximately 96% of existing loans carry an interest rate lower than the recent rate of 7.125% according to loan-level mortgage data from ICE, the borrower can get help to overcome their hardship while retaining a more favorable interest rate.
Homeowner Obligations
To use the Payment Supplement, the homeowner must have a fixed-rate mortgage and meet other program requirements. They must also agree to enter into a zero-interest promissory note and subordinate mortgage with HUD and execute a Payment Supplement Agreement. This second lien is between the borrower and HUD and is administered by HUD’s servicer. The borrower then repays HUD for the amount of payment supplements received when the first lien mortgage matures, refinances, pays off or the property transfers.
Similar to a standard Partial Claim, servicers must advance the funds necessary to bring the loan current. To fund the new Payment Supplement account, servicers can either 1) advance funds to fund the Payment Supplement Account and submit a claim to HUD for reimbursement or 2) wait to fund the Payment Supplement Account until they receive the claim payment, but in all cases must be ready to accept the reduced payments and apply the supplement with the applicable workout effective due date. The funds in the Payment Supplement Account, managed by the servicer in a separate deposit account, do not accrue interest for either the servicer or the borrower.
Program Terms
In addition to bringing the loan current, FHA establishes a maximum and minimum Monthly Principal Reduction (MoPR) that will be applied for 36 months. The maximum MoPR is 25% of the borrower’s monthly principal and interest payment not to exceed the principal component of the monthly payment. FHA also establishes a 5% minimum monthly principal and interest payment reduction (but no less than $20). It is important to remember that Payment Supplement funds cannot be used to supplement interest and total Partial Claims (both Payment Supplement and prior Partial Claims) cannot exceed 30% of the outstanding balance of the loan at the time of the initial Partial Claim. After 36 months, the borrower must resume paying the full contractual monthly mortgage payment.
Documentation, Disclosures and Monthly Obligations
There are some specific requirements you’ll need to plan for in advance.
For example, the servicer must have the borrower execute the Payment Supplement documents (Payment Supplement note, Payment Supplement Agreement, and Payment Supplement security instrument) and ultimately deliver these documents to HUD. The servicer must also record the Payment Supplement mortgage.
Servicers must retain specific data and documents related to the Payment Supplement transaction in the Servicing File and the Claim Review File:
Documentation of the amount used to bring the loan current
Documentation of the amount of each MoPR applied to the principal due on the borrower’s monthly payment
A copy of the executed Payment Supplement Documents
The date the servicer received the executed Payment Supplement Documents from the borrower and the date the subordinate Mortgage was sent to be recorded
Evidence that the subordinate mortgage was submitted timely for recording
Also, each month of the Payment Supplement Period, the servicer must only disburse funds from the Payment Supplement Account to apply the MoPR to the principal portion of the monthly payment after the servicer has received the borrower’s portion of the payment.
Additional funds received from the borrower do not impact the application of the MoPR and must not be commingled with the MoPR or funds held in the Payment Supplement Account.
The servicer must send the borrower written disclosures annually and between 60 and 90 days
before the expiration of the Payment Supplement Period provide an accounting of Payment Supplement funds and when the borrower must resume making full payments. The FHA provides model disclosures that the servicer may use to meet this requirement.
Observations for a Successful Implementation
FHA’s Payment Supplement affects multiple areas of loan servicing, and servicers will need to develop procedures and work with their technology solutions to be ready to support this new program. Servicers should consider the following:
Using or updating technology that can help perform the complex loss mitigation waterfall calculations so that you can determine borrower eligibility and the amount of payment supplement available.
Establishing processes for redefaults scenarios, including calculating the borrower’s component of reinstatement figures.
Establishing new Single Family Default Monitoring System reporting requirements to include all active Payment Supplement loans in monthly reporting.
Processing payments with multiple subsidies, such as interest rate buydowns and SCRA rate reductions.
Establishing the ability to keep Payment Supplement funds in a separate deposit account.
Producing borrower-facing annual and final notices on the use of the Payment Supplement funds and providing an accounting to HUD upon termination or completion of the Payment Supplement. Servicers must also be prepared to remit the remaining Payment Supplement funds to HUD when applicable.
Working with print vendors on presenting the Payment Supplement data on periodic statements and other notices/forms.
Presenting closing agents with Payment Supplement details when a first lien payoff is requested so the closing agent can process an accurate payoff of the Payment Supplement note to HUD. The servicer should also consider how to address intervening events before payoff.
If you haven’t already, this is the time to start working with your third-party providers and internal teams so you’re ready to implement Payment Supplement. You’ll want to do this well before the January 1, 2025, effective date to allow for adequate staff training and system testing and validation.
While this option may fall “last” in FHA’s loss mitigation waterfall, we think it holds a huge potential to impact FHA borrowers struggling to pay their mortgage — a number on the rise already in 2024 — and sets a model for other investors to follow.
(Views expressed in this article do not necessarily reflect policies of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA NewsLink welcomes your submissions. Inquiries can be sent to Editor Michael Tucker or Editorial Manager Anneliese Mahoney.)
