FHA Commissioner Gordon Announces New Loss Mitigation Option: #MBAServicing24

(Left to right: John Bell, Executive Director, Loan Guaranty Service, U.S. Department of Veterans Affairs; Julia Gordon, FHA Commissioner, U.S. Department of Housing and Urban Development; Ingrid Ripley, Executive Director, Single-Family Housing Guaranteed Loan Program, USDA Rural Development; Sam Valverde, Principal Executive Vice President, Ginnie Mae))

ORLANDO–Loss mitigation made news last week at MBA’s Servicing Solutions Conference & Expo 2024.

“It seems like when I come to this conference, I feel the need to announce things,” said Julia Gordon, Assistant Secretary for Policy and Federal Housing Commissioner with the U.S. Department of Housing and Urban Development. “So we do have an announcement this morning, which is this: we have posted a final Mortgagee Letter on the payment supplement partial claim.”

“For anyone who doesn’t know what that is, this is a brand-new innovation in loss mitigation,” Gordon said. “It’s designed to address what every servicer is seeing, which is that the FHA recovery mod does not work so well when a borrower comes in with a mortgage rate that’s significantly lower than prevailing rates.”

“So we have created an option where we can use the partial claim–you can use it the way you’ve always used it, which is to cancel arrearages that the borrower has. But any available partial claim beyond the arrearages is then going to be held by the servicer in a custodial account. And on behalf of FHA, what you will do with that account is contribute a little bit to P&I payments every month. So that for the borrower it effectively reduces their payment, even when we couldn’t reduce the payment through the normal rate term mod.”

Gordon noted the program will be temporary. “It’s going to be a three-year program, enabling borrowers to get back on their feet to handle whatever hardship they have to handle. If they stay in their home, at the end of those three years, they will resume their full mortgage payments. But it is part of the PC, so that is paid off at the time a regular partial claim is–when the borrower sells or refinances or the mortgage terminates.”

The program could potentially help tens of thousands of borrowers, Gordon said. “Certainly thousands of people,” she said. “It will really help them right now. And we know that everybody’s been seeing default rates creep up. This is a brand-new tool that should really help.”

MBA President and CEO Bob Broeksmit, CMB, said MBA supports the additional tool to allow servicers to better help struggling borrowers avoid foreclosure in today’s high interest rate environment and commended FHA for its transparency and engagement with industry stakeholders throughout the proposal process.

“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,” Broeksmit said. “As recommended, a longer implementation period of January 2025, and extending the sunset date of the COVID-19 Recovery Options beyond that date, will further support servicers’ implementation efforts.”

Broeksmit said MBA will work with FHA on implementing the Payment Supplement as well as its other loss mitigation programs, “with a shared goal of assisting distressed borrowers while protecting the Mutual Mortgage Insurance Fund and ensuring secondary market certainty.”

The Payment Supplement is a new approach to deploying partial claim funds to support servicers’ home retention and loss mitigation efforts. MBA noted that while FHA’s final policy remains resource-intensive, it simplifies much of the operational complexity that existed with FHA’s initial proposal and reflects much of the feedback MBA provided through two iterations of industry review.

Highlights of the Payment Supplement include:
-An increased incentive payment from $1,000 to $1,750

-Providing model documents, including the Payment Supplement Agreement and the Annual and Final Disclosures

-Allowing servicers to implement the Payment Supplement starting on May 1, 2024, and no later than January 1, 2025. The extended compliance date provides additional time for servicers to operationalize the program, as requested by MBA.

-Extending the COVID-19 Recovery Loss Mitigation Waterfall for all borrowers until April 1, 2025.