The U.S. Department of Housing & Urban Development (HUD) has issued Mortgagee Letter 2024-02, establishing the Federal Housing Administration’s (FHA) Payment Supplement, a new loss mitigation alternative to a traditional loan modification.
The new option is set to begin May 1, 2024, but will become mandatory on January 1, 2025.
“MBA [Mortgage Bankers Association] supports this additional tool that will allow servicers to better help struggling borrowers avoid foreclosure in today’s high-interest rate environment and commends FHA for its transparency and engagement with industry stakeholders throughout the proposal process,” said MBA President and CEO Robert D. Broeksmit, CMB.
HUD reports that since March of 2020, mortgagees have provided nearly two million COVID-19 loss mitigation actions to borrowers.
On January 30, 2023, HUD extended and expanded its COVID-19 Loss Mitigation Options to provide borrowers with options to bring their mortgage current, and reduce the monthly principal and interest (P&I) portion of their monthly mortgage payment to reduce the risk of re-default. The FHA offered COVID-19 Recovery Options to borrowers who were on a COVID-19 Forbearance, or borrowers who did not participate in a COVID-19 Forbearance that were 90 days or more delinquent through October 30, 2024.
“While these options have been very effective, interest rates have risen to levels significantly higher than the interest rates of many of the Mortgages in FHA’s portfolio, impacting the ability of mortgagees to meaningfully assist borrowers who cannot afford to resume their regular monthly payments,” said HUD in Mortgagee Letter 2024-02.
Interest rates have risen once again after a slight lull. According to Freddie Mac’s latest Primary Mortgage Market Survey (PMMS), the 30-year fixed-rate mortgage (FRM) averaged 6.77% for the week ending February 15, up from the previous week’s reading of 6.64%. A year ago at this time, the 30-year FRM averaged 6.32%.
HUD’s actions through the Payment Supplement will not only assist distressed borrowers nationwide, but will reduce losses to HUD’s Mutual Mortgage Insurance Fund (MMIF), which insures lenders against losses when borrowers default on their loans.
“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,” added Broeksmit. “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.”
According to Mortgagee Letter 2024-02, the Payment Supplement will combine a standalone Partial Claim to bring the mortgage current with a new Monthly Principal Reduction (MoPR) payment. This will temporarily reduce the borrower’s monthly payment for a period of three years, without requiring the mortgage to be modified.
After the Payment Supplement Period ends, the borrower will be responsible for resuming payment of the full monthly P&I amount.
HUD also stated that it intends to make the Payment Supplement a permanent part of FHA’s loss mitigation options, and will incorporate language to do so in a future Mortgagee Letter or as an update to HUD’s Handbook 4000.1.
“MBA will work with FHA on the implementation of 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,” said Broeksmit.
