On November 16, 2023, in response to comments received on a prior draft Mortgagee Letter (ML) related to a Proposed Payment Supplement Partial Claim, the Federal Housing Administration (FHA) published another draft ML titled “Payment Supplement.” The prior draft ML proposed a payment supplement partial claim that would cure mortgage arrearages and temporarily reduce a borrower’s monthly mortgage payment. The most recent draft ML makes significant operational revisions to the prior ML, while also offering a loss mitigation option aimed at assisting borrowers with avoiding foreclosure.
Key differences between the prior draft ML and the most recent draft ML include:
- No longer a standalone Partial Claim. The new loss mitigation option is now referred to as a “Payment Supplement,” as opposed to the prior “Payment Supplement Partial Claim.” The new proposal combines a standalone Partial Claim to bring the mortgage current with a new Monthly Principal Reduction (MoPR). According to the FHA, the new proposal “will temporarily provide a monthly payment towards the principal portion of a Borrower’s monthly Mortgage Payment, without requiring the Mortgage to be modified.”
- Temporary payment reduction time period. The most recent draft ML states that the Payment Supplement will provide a temporary payment reduction for three years, after which the borrower will be required to resume their full monthly payments. The prior draft stated a temporary reduction for three to five years.
- Servicing transfer responsibilities. Under the most recent draft ML, a transferee servicing mortgagee is required to ensure the transfer of any outstanding Payment Supplement Account and associated servicing records. The most recent draft ML also lists additional responsibilities for the transferee servicer, including proper accounting and proper administration.
- Principal and interest (P&I) reduction. The most recent draft ML reduces the P&I payment reduction threshold from 20% to 15%. Specifically, if the borrower cannot achieve the target payment using several listed loss mitigation options, including a COVID-19 Recovery Modification, the mortgagee must offer the borrower the COVID-19 Recovery Modification if the loss mitigation option would achieve a minimum of 15% P&I payment reduction. The prior draft ML contained a 20% threshold.
- Payment Supplement Account. The most recent draft ML requires mortgagees to establish a “Payment Supplement Account,” a separate, non-interest-bearing custodial account that holds the balance of the funds paid by FHA for the purpose of implementing the Payment Supplement, clearly marked as holding funds for the Payment Supplement, and kept separate from funds associated with the FHA-insured mortgage, including escrow funds. FHA also notes that mortgagees may hold MoPR funds for multiple mortgages in a single account for implementing the Payment Supplement. Mortgagees must not commingle MoPR with funds associated with any FHA-insured mortgage, escrow funds, funds used for the mortgagee’s general operating purposes, or any other purpose.
- Payment Supplement Period. FHA now proposes that the Payment Supplement Period be a 36-month period during which the mortgagee applies the MoPR to reduce the borrower’s monthly mortgage payment. The prior draft ML proposed a 36- to 60-month period.
- Monthly Principal Reduction (MoPR). Under the most recent draft ML, the maximum MoPR is the lesser of the initial monthly principal payment or a 25% P&I reduction for 36 months. The minimum MoPR is a 5% and $20 P&I reduction for 36 months. The prior draft ML proposed a maximum MoPR of the lesser of the monthly principal payment or a 25% P&I reduction for 48 months followed by a 12.5% P&I reduction for 12 months. Further, under the prior draft ML, the minimum MoPR was a 5% P&I reduction for a term of 36 months.
- Payment reduction calculation. Both MLs detail methods to calculate the amount of the Partial Claim the mortgagee submits to HUD for the Payment Supplement. However, the most recent draft ML includes a “Payment Reduction Test” if the borrower does not have sufficient Partial Claim funds available for a maximum MoPR for 36 months Specifically, the mortgagee must determine if the MoPR will result in at least a 5% or $20 reduction of the P&I portion of the borrower’s monthly payment for 36 months where the MoPR is only applied to principal.
- Payment Supplement Disclosures. While both MLs mention that a mortgagee is required to send the borrower a written annual disclosure, the most recent draft ML includes additional information that must be included in the disclosure. For instance, the most recent draft ML notes that the annual disclosure must include:
- Information on the funds applied to the arrearages upon execution of the Payment Supplement Agreement;
- Information on the funds remaining in the Payment Supplement Account; and
- A statement that the borrower may voluntarily terminate the Payment Supplement Agreement with any remaining funds in the Payment Supplement Account being returned to HUD to repay the total outstanding Payment Supplement balance.
The FHA also provided draft consumer disclosures related to the Payment Supplement, including an Annual Disclosure Statement Model Document and Payment Calculation Worksheet. Comments on the draft ML were due on December 7, 2023. The FHA has also expressed that feedback received will be carefully consider prior to release of a final ML.