The Federal Housing Administration (FHA) recently announced a new loss mitigation home retention option for borrowers with FHA-insured single family forward mortgages who are behind on their mortgage payments. The new offering, called the Payment Supplement, provides mortgage servicers with an additional tool to temporarily reduce a borrower’s monthly mortgage payment by up to 25 percent without modifying the mortgage’s current interest rate, FHA announced in a release.
The Payment Supplement is meant to help those borrowers who cannot sufficiently be assisted by existing FHA home retention solutions because the interest rate on their mortgage is lower than current interest rates. It is the latest addition to a suite of FHA loss mitigation options that has kept more than 1.6 million struggling borrowers in their homes since the start of the Biden administration.
“HUD uses every tool in our toolkit to ensure we can help struggling borrowers avoid foreclosure,” HUD Secretary Marcia Fudge said in the release. “The new policy will enable the families we serve to get back on their feet while staying in their homes.”
When implemented, the Payment Supplement will allow mortgage servicers to temporarily reduce a borrower’s mortgage payment by using funds from a Partial Claim which enables the borrower to access up to 30 percent of the outstanding balance of their FHA-insured mortgage. The Partial Claim amount is placed in a junior lien and paid back when the homeowner sells or refinances the home, or the mortgage otherwise terminates.
Under the Payment Supplement, the Partial Claim funds are used to pay any arrearages and to bring the borrower’s mortgage payment current. Next, the remaining funds are deposited in an FHA custodial account managed by the mortgage servicer and used to temporarily supplement the principal and interest portion of a borrower’s mortgage payment each month, with a target of up to a 25 percent reduction in monthly principal and interest payments.
“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,” FHA Commissioner Julia Gordon 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.”
The Payment Supplement option is available to all borrowers who have not already exhausted their Partial Claim allowance through previous loss mitigation actions. Mortgage servicers may begin implementing Payment Supplement on May 1 but must implement the solution for all eligible borrowers by Jan. 1, 2025.
In addition to the publication of the Payment Supplement policy, FHA also announced it is extending its full suite of temporary loss mitigation options through April 30, 2025. The existing loss mitigation options, originally developed as part of FHA’s COVID-19 recovery efforts, are currently available to mortgage servicers for all borrowers who are behind on their mortgage payments, regardless of the reason for their hardship. The options were originally set to expire on Oct. 30.