The Federal Housing Administration (FHA) has introduced an alternative program aimed at assisting borrowers who are behind on payments, as financial pressure continues to escalate within FHA portfolios, according to the Scotsman Guide. A draft mortgagee letter released on Monday outlined the Reinstatement Advance Payment (RAP) approach, which would remove the requirement for registering subordinate liens on new FHA partial claims, loan modifications, and payment supplements for participating servicers.
This proposed modification, which may allow the Department of Housing and Urban Development (HUD) to recover a greater amount of equity from FHA-insured borrowers facing foreclosure, arises as the housing agency has experienced a significant increase in losses from real estate owned (REO) sales over the past year.
As per the single-family FHA loan performance data released in June, HUD reported an average dollar loss exceeding $108,000 on 407 dispositions in April, the most recent month for which data is available. This is in contrast to an average loss of approximately $70,000 on 348 dispositions from the same month a year earlier.
In terms of the loss component related to defaulted loan balances, the loss on collateral—defined as the amount the agency receives from an REO sale minus the unpaid principal balance—has increased to 16.6% of the defaulted loan balance as of April.
Servicing professionals who engaged in discussions about the proposal with Scotsman Guide characterized the alternative—which allows servicers to participate voluntarily—as a means to better align the FHA’s partial claims process with those of Fannie Mae and Freddie Mac. Servicers opting to participate will not be required to prepare, execute, and record liens for each new partial claim.
“This seems to be very consistent with streamlining the servicing process, and that is a good thing,” said Seth Sprague, director of mortgage banking services at Richey May. “I do worry a little bit that the further we get away from the creation of the ‘silent seconds,’ the less the borrower will remember that that balance is due.”
Detailing the RAP Initiative
Under the RAP proposal, FHA servicers would provide the necessary funds to reinstate a borrower. This amount would be recorded as a non-interest-bearing balance linked to the current FHA-insured first mortgage, instead of being classified as a separate subordinate mortgage and subordinate lien.
“The RAP will reduce the burden on mortgagees in obtaining and recording the notes and subordinate mortgages and align with standard industry practice,” the proposal states, underscoring operational cost savings for FHA servicers.
The FHA stated that borrowers’ experiences in obtaining payment assistance through RAP agreements will remain the same as the existing partial claims process, with the advance continuing to be a zero-interest loan that is generally payable at maturity, sale, refinance, mortgage payoff, or the termination of the FHA insurance policy.
“The RAP will also facilitate the sale, refinance, assumption, and transfer processes as there will no longer be a subordinate lien to resolve,” the proposal adds, eliminating challenges associated with nonjudicial foreclosures of FHA-backed first mortgages.
Nonetheless, this transition highlights HUD’s recent buildup of a significant inventory of subordinate liens, as distressed FHA borrowers—many of whom have done so repeatedly—accumulated partial claims against FHA first liens via emergency loss mitigation programs that were in place until last October.
“It looks like they are trying to solve some significant issues that have come up with the current program,” said Donna Schmidt, president and CEO of DLS Servicing.
Schmidt estimates about half of FHA loans had at least one previous partial claim as of October. In 2026, foreclosure activity has surged significantly after experiencing a complete standstill during and in the years that followed the COVID-19 pandemic. As of May, FHA borrowers accounted for 55% of all seriously delinquent home loans, marking a record high, according to ICE Mortgage Technology.
Schmidt elaborated that by removing the subordinate lien requirement, HUD increases its chances of recovering partial claim advances that would usually be eliminated during foreclosure proceedings as subordinate liens. She stated that by abolishing the subordinate lien through RAP, HUD could more effectively recapture advances and the unpaid principal balance.
“FHA is basically saying that it doesn’t need or want any more subordinate liens on its portfolio,” Schmidt said.
Conclusion & Overview
The FHA proposal includes the RAP Terms of Repayment (RAPTOR) Plan designed for borrowers who cannot repay the full RAP balance in a lump sum when their first-lien mortgage matures. According to the program’s terms, servicers are permitted to offer repayment periods of up to 18 months for RAP balances not exceeding $5,000; up to 36 months for balances ranging from $5,000 to $15,000; and up to 48 months for balances surpassing $15,000.
The pilot program is proposed to last for five years, during which the FHA has suggested incentive fees for participating servicers amounting to $500 for partial claim RAPs and $1,750 for payment supplement RAPs, along with reimbursement of up to $250 for title-related expenses.
Under these proposals, servicers that choose to participate in the program will be entirely responsible for monitoring all repayments of partial claim funds and ensuring that these funds, along with scheduled interest, principal, and FHA insurance payments, are returned to HUD.
