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On May 31, 2023, the Federal Housing Administration (FHA) published a draft Mortgagee Letter (ML) titled “Proposed Payment Supplement Partial Claim.” The draft ML proposes use of available partial claims funds to create a new loss mitigation option to assist struggling borrowers.

Generally, a partial claim is an interest-free subordinate loan issued by the United States Department of Housing and Urban Development (HUD) used to pay a portion of a borrower’s past due balance. In certain situations, the remainder of the loan balance is added to the borrower’s principal loan balance, while also extending the loan term for 30 years at a fixed interest rate.

On the other hand, the proposed Payment Supplemental Partial Claim (Payment Supplemental PC) will allow borrowers to apply partial claim funds to past due balances – also referred to as an arrearage – and then monthly to the remaining principal balance, thereby lowering the borrower’s monthly payment. The monthly payment reduction is temporary, however, lasting three to five years, after which the borrower’s monthly payments will increase back to the full amount. Further, the Payment Supplemental PC will also result in an interest-free Partial Claim Note, with a Payment Supplement Agreement rider, secured by a subordinate mortgage that will not require repayment of the partial claim until maturity of the mortgage, a sale or transfer of the property, payoff of the mortgage, or the loss of FHA-insured status on the mortgage.

In short, the Payment Supplemental PC would allow borrowers to use available partial claim funds to 1) cure mortgage arrearages and 2) temporarily reduce the borrower’s monthly mortgage payment.

FHA notes in the draft ML that the impetus behind the proposed new loss mitigation option was the increasing interest rate environment. According to the FHA, despite a plethora of current loss mitigation options available to borrowers, “interest rates have risen quickly, impacting the ability of Mortgagees to meaningfully assist Borrowers who cannot afford to resume their regular monthly payments.” As such the proposed Payment Supplement PC would further assist borrowers in retaining their homes.

Feedback to the draft ML was due on June 30, 2023.