FHA Proposes New Way to Prevent Foreclosures

WASHINGTON – The Federal Housing Administration (FHA) posted a proposal for a new home retention option to help struggling homeowners meet their mortgage obligations. It’s now taking comments from the public about the proposed changes until June 30, 2023.

The new option – called the Payment Supplement Partial Claim – would allow mortgage servicers to use the FHA Partial Claim for two things – to bring a borrower’s mortgage current and to provide temporary reductions to their monthly mortgage payments for up to five years.

Interest rate increases over the past year have limited the effectiveness of some of FHA’s existing loss mitigation options if assisting borrowers. Its widely used loan modification option, which has historically reduced borrowers’ monthly payments to levels they can afford, isn’t as effective because borrowers have to modify their loans at today’s market rates. In most cases, those are higher – and sometimes a lot higher – than their original loan rates.

Under the Payment Supplement Partial Claim, homeowners experiencing hardship and unable to find any other options would be able 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 would then pay FHA back when they sell their home or refinance.

“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,” says 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.”

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