In a bid to avoid a wave of COVID-19-related foreclosures, the Department of Housing and Urban Development (HUD) published Mortgagee Letter 2021-18 to lenders and servicers on July 23, 2021, that will allow borrowers with loans insured by the Federal Housing Agency (FHA) to extend the term of their mortgages and lock in lower monthly principal and interest payments in order to resolve COVID-19 financial distress.
The changes are a continuation of earlier programs initiated in response to the pandemic, which allowed borrowers to forbear monthly payments for up to 18 months if they were impacted by COVID-19. It is expected that these loans will roll off the 18-month forbearance in September and October. HUD’s concern is that, despite improving economic conditions, many of these borrowers either will not be able to resume making regular payments or will not be able to repay the arrearages that accrued during their extended forbearance.
HUD explains that its New COVID-19 Recovery Waterfall “streamlines and revises FHA’s previous options for struggling homeowners, reduces required documentation, and allows mortgage servicers to provide greater payment reduction for eligible homeowners with FHA-insured Single Family Title II forward mortgages.”
The New COVID-19 Recovery Waterfall is in addition to the recently announced COVID-19 Advance Loan Modification (COVID-19 ALM) review program, which should take place before the new waterfall steps. For the COVID-19 ALM review, servicers must proactively offer the COVID-19 ALM to eligible delinquent consumers who can achieve a 25% reduction to the principal and interest portion of the monthly mortgage payment through a 30-year rate and term loan modification. Servicers should note that the COVID-19 ALM does not require contact with the consumer before it can be offered.
The New COVID-19 Recovery Waterfall replaces the COVID-19 Standalone Partial Claim, which has been in place for several months, with a modified COVID-19 Recovery Standalone Partial Claim. As with other HUD partial claim options, the COVID-19 Recovery Standalone Partial Claim is a 0% interest subordinate lien. It is only available for consumers who affirm they can resume their existing monthly mortgage payment. The key difference in the new partial claim is that it is limited to 25% of the consumer’s unpaid principal balance, rather than the 30% limit for FHA-HAMP and prior COVID-19 partial claims, “[in] order to preserve flexibility to provide loss mitigation options for natural disasters and other default episodes that may arise in the future.”
The next step in the New COVID-19 Recovery Waterfall is consideration of the new COVID-19 Recovery Modification. This 360-month loan modification must include a partial claim if one is available to the consumer. The COVID-19 Recovery Modification must achieve a 25% reduction of the loan’s principal and monthly interest payment.
FHA mortgagees must re-review borrowers for the newly announced COVID-19 Recovery Options by October 22, 2021, if (1) the mortgagee has not sent final documentation for a previously available COVID-19 Home Retention Option by August 22, 2021; (2) the borrower was not eligible for a COVID-19 Home Retention Option; or (3) the borrower became delinquent due to the COVID-19 pandemic after reinstating using a COVID-19 Home Retention Option. FHA mortgagees must also notify borrowers that they can apply for the Department of Treasury’s Homeowner Assistance Fund if it is available in their jurisdiction.
There is a 30-day public feedback period for Mortgagee Letter 2021-18. A servicer must implement the COVID-19 Recovery Options no later than October 21, 2021, though lenders and servicers can begin implementation as soon as they are able.