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FHA Proposes New Mortgage Payment Reductions

The Federal Housing Administration (FHA) is seeking feedback on a new proposal for a home retention option to help struggling homeowners meet their mortgage obligations. The new option, the Payment Supplement Partial Claim, would allow mortgage servicers to use the FHA Partial Claim both to bring a borrower’s mortgage current and to provide temporary reductions to their monthly mortgage payments for up to five years.

The rapid and steep interest rate increases of the past year have limited the effectiveness of some of FHA’s existing loss mitigation options in assisting borrowers. Just last week, Freddie Mac reported the 30-year, fixed-rate mortgage (FRM) hitting an average of 6.57%, amid ongoing financial volatility.

“Many homeowners continue to experience hardships due to health or financial difficulties that occurred during the pandemic, and these challenges have been exacerbated for these and other borrowers by current economic uncertainties,” said Assistant Secretary for Housing and Federal Housing Commissioner Julia Gordon. “When we saw that our existing loan modifications were no longer providing adequate payment relief, our team painstakingly explored every possible alternative to provide relief in the current rate environment, resulting in this innovative proposal.”

FHA’s loan modification option, which has historically reduced borrowers’ monthly payments to levels they can afford, is no longer as effective as it once was because borrowers are forced to modify at market rates that may be higher than their current rates.

The Payment Supplement Partial Claim will allow homeowners experiencing a hardship who are unable to obtain a significant payment reduction with other loss mitigation options to keep their existing interest rate and reduce their monthly payment temporarily using funds from the FHA Partial Claim, which is a subordinate zero interest lien. The homeowners then pay FHA back when they sell their home or refinance it.

According to HUD, since the start of the COVID-19 pandemic, mortgagees have provided in excess of 1.3 million COVID-19 loss mitigation actions to borrowers. On January 30, 2023, HUD extended and expanded its COVID-19 Loss Mitigation Options.

To facilitate FHA's review and analysis of feedback, interested stakeholders are encouraged to thoroughly review the content of the Draft ML and use the Feedback Response Worksheet to provide feedback through June 30, 2023:

About Author: Eric C. Peck

Eric C. Peck has 20-plus years’ experience covering the mortgage industry, he most recently served as Editor-in-Chief for The Mortgage Press and National Mortgage Professional Magazine. Peck graduated from the New York Institute of Technology where he received his B.A. in Communication Arts/Media. After graduating, he began his professional career with Videography Magazine before landing in the mortgage space. Peck has edited three published books and has served as Copy Editor for Entrepreneur.com.

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