FHA announces new changes to loss mitigation waterfall
The Federal Housing Administration (FHA) announced on Monday changes to its loss mitigation options for borrowers struggling to pay their mortgages.
The announcement follows the Biden administration’s decision to set an end date for the COVID-19 pandemic national emergency declaration.
Meanwhile, the FHA-Home Affordable Modification (FHA-HAMP) options were temporarily suspended to simplify loss mitigation options, according to the FHA.
The main change is that servicers will have to offer Covid-19 loss mitigation options to all FHA’s eligible borrowers who fall behind on their mortgage payments, regardless of their hardship reason.
The toolkit will be available 18 months past the mandatory effective date of April 30, but “servicers may begin offering these options to borrowers immediately,” according to the FHA.
“FHA’s COVID-19 forbearances and streamlined COVID-19 loss mitigation options have successfully helped millions of struggling borrowers in the last two fiscal years alone,” Julia Gordon, assistant secretary of Housing and Federal Housing Commissioner, said in a statement. “Our action today lets us capitalize on what we have learned through the pandemic to continue helping borrowers avoid foreclosure, regardless of the nature of their hardship.”
The latest data shows that the FHA’s serious delinquency rate was 4.79% in November 2022, compared to 7.83% in November 2021.
The national forbearance plan and temporary Covid-19 recovery options deadline were slated to expire when the COVID-19 pandemic national emergency declaration ends.
On Monday, the Biden administration revealed its plan to end the COVID-19 national emergency and public health emergency on May 11. (They were set to expire on March 1 and April 11, respectively.)
“An abrupt end to the emergency declarations would create wide-ranging chaos and uncertainty throughout the health care system — for states, for hospitals and doctors’ offices, and, most importantly, for tens of millions of Americans,” the White House said in a statement.
Changes to the waterfall
The FHA also made changes to the loss mitigation toolkit. It’s raising the maximum partial claim amount from 25% of the mortgage‘s unpaid principal balance to the maximum 30% allowed by statute.
A partial claim works like an interest-free loan that borrowers can take to make their mortgage current. The money is repaid after the last mortgage payment, when the loan is refinanced or the property is sold.
If available, the partial claim is also used in Covid-19 recovery modifications to resolve outstanding arrearages. The partial claim cap for this option will also be 30% starting on April 30.
“This increase will help more borrowers who cannot return to making their current mortgage payments to reduce their mortgage balance to a level that permits them to achieve a target payment reduction of at least 25% despite today’s higher interest rates,” the FHA said in a statement.
The FHA also announced it is adding borrowers who qualified or used Homeowners Assistance Funds (HAF) to the definition of imminent default. It will allow them to have access to the loss mitigation options to avoid redefault when needed.
Servicers will also have access to incentive payments for successfully completing Covid-19 recovery options, which were previously only available for the standard loss mitigation options.