The Federal Housing Administration has introduced a new loss-mitigation concept to add to the set of temporary innovations that have emerged from the pandemic.
The payment supplement partial claim is aimed at allowing servicers to help borrowers who meet certain criteria and can’t reduce their payments through other methods like modifying at current rates that in many cases have become higher than what borrowers had at origination.
“The struggle is that in the rising rate environment, if you want to recast a mortgage, someone might go from maybe around 3%, to a rate of 6% or more, and they really wouldn’t see any reduction in their monthly payment,” said Peter Idziak, senior associate, Polunsky Beitel Green.
The draft concept appears to provide a mechanism through which the mortgage can stay at its original rate and the payment can be supplemented by a second lien loan that’s applied to monthly principal for three to five years, after it absorbs any arrearages.
This would allow borrowers with reduced incomes to pay reduced amounts during the three-to-five year period, according to the FHA, which is an arm of the Department of Housing and Urban Development. The payment returns to normal afterwards, potentially with an ease-in period.
The FHA currently plans to test drive its existing set of post-pandemic loss mitigation options through at least October 30, 2024 and the innovation will likely have the same end date if it moves forward.
Servicers would get $1,000 for implementing the new type of partial claim as a one-time incentive. How that measures up to expenses related to the work they’ll need to do to manage the PSPC and the related reimbursement process remains to be seen.
A worksheet the FHA is floating with the draft concept asks servicers how their costs and liquidity might be affected.
Ginnie Mae, an agency which insures securitizations of FHA and other government-backed loans, had not responded to an inquiry from this publication at deadline about how or whether it might accommodate the innovation.
FHA is accepting comments on its draft notice for the payment supplement partial claim through June 30.
The FHA has been slowly introducing increasing amounts of flexibility into its loss mitigation tool set.
Prior to the introduction of the PSPC, it added a standalone 40-year modification. However, even with that innovation, borrowers with longer-term reductions in income found it difficult to reduce their original payments with a market-rate mod.
It also remains to be seen whether politicians that have been increasingly sensitive to public expenditures amid debt ceiling negotiations and the official end to the pandemic will receive the PSPC as a concept.
While it keeps borrowers on the hook for their original mortgage obligation, it does essentially give them a 0% loan from the government for a three-to-five year period to account for a temporary loss of income during that time.
The real test of PSPC’s effectiveness would likely be borrowers’ uptake and reperformance rates. When borrowers are able to resume payments it tends to maximize the market value of a formerly distressed loan and losses to the industry and HUD.
However, borrowers whose financial distress is too great or who ultimately do not recover their original incomes within three to five years may not be able to resume payments. In that case, the borrower might be best served by finding cheaper housing and returning their mortgaged property to the market, which has been a limited supply of affordable inventory for new buyers.
These are the types of considerations that will be likely taken into account when it comes to determining how and whether the concept becomes adopted for permanent use, Idziak said.
“Homeownership is obviously promoted as the American dream and an important aspect of wealth building. A foreclosure, being forced to sell and move, is definitely a traumatic event. So hopefully this program is something that will help qualifying borrowers out,” said Idziak.