The Federal Housing Administration’s latest version of a proposed vehicle for helping distressed borrowers with older loans obtain affordable payments responds to some key industry requests.
Notably, it reduces what would have been a complicated claim process for mortgages the FHA insures when the strategy gets used, in line with a previous ask for simplification from trade associations, according to the Housing Policy Council.
“This is probably the most significant change: They were going to have servicers submit multiple and ongoing claim submissions, and they’ve moved to a one-time submission,” said Matt Douglas, senior vice president, mortgage policy, HPC.
The term of the redrafted payment-supplement partial claim also no longer includes a complicated set of rules for the remuneration period, which is now set at three years as housing finance organizations had requested.
“It previously had been pretty complex,” said Pete Mills, senior vice president of residential policy and member engagement at the Mortgage Bankers Association.
The FHA did not raise incentives connected with the foreclosure prevention strategy the way some advocates hoped, but with the process for claims streamlined, they were reconsidering their position on what type of payments would be appropriate at deadline.
“This is going to require less work. We need to take a look at what’s a reasonable request for an incentive. That’s an open question. I don’t think we have developed a position on that yet,” Douglas said.
The administration has promised not to move ahead on the proposal without reviewing another round of feedback, which is due by Dec. 7.
“This one was particularly complicated. We’re very appreciative we got back to the drafting table one more time, even with a short turnaround,” Mills said. “I give the FHA a fair amount of credit for using the drafting table, not just for this, but in general. I think it results in better policy.”
The FHA would now like to implement the PSPC within nine months of finalizing it. That’s more than the six months previously floated but less than the year residential entities originally sought.
“I think it’ll probably include the option to implement sooner, in cases where you can’t, this certainly addresses some of the challenges of getting this built into the permanent FHA loss-mitigation waterfall,” Mills said.
There’s a balance that should be struck between meeting borrower needs for the PSPC that exists under current market conditions, and the need for the industry to have enough bandwidth to take all the steps required to make sure it’s operationally effective, Douglas said.
“A loss mitigation offering that works more effectively in a high interest rate environment is a tool that we think FHA needs. However, this is a novel, untested concept that we want to make sure we get it right,” said Douglas.
The vehicle for the payment-supplement partial claim is a subordinate lien. That avoids a modification of the first lien that would create a need to adjust the loan to the higher market rate.
“There’s a second lien in favor of HUD that secures the repayment of the amounts that HUD has extended to bring the loan current,” said James Wright Jr., a partner that represents banks and other financial services companies at Bradley, a national law firm.
“It’s a 0% loan but it does have to be paid off either when it’s refinanced or when the property is sold,” he added, noting that if the loan does extend out to its full term the borrower may have a balloon payment at the end.
One thing the FHA has not produced yet, but servicers would like to review, are certain documents involved.
“We do think that’s an important step so that we understand: What does the model note look like? What does the model borrower agreement look like? What does the rider to the note look like? We have asked for them to publish that and they have not yet,” Douglas said.
