FHA Introduces Simplified COVID-19 Restoration “Waterfall”
As noted in June, the FHA released a completely revised version of its “waterfall” loss mitigation options late last week for borrowers who reached the end of their grace period.
To streamline the process, the administration is scraping its old waterfall framework and instead offering two options for service providers handling borrowers who come out of forbearance: a standalone partial COVID-19 recovery claim for borrowers who resume payments on their mortgage can, and a COVID-19 recovery modification option for borrowers who cannot.
According to the government, these steps were taken to “support sustainable and equitable recovery and protect the Mutual Mortgage Insurance Fund (MMIF).”
The standalone installment offered to borrowers who can resume their payments will replace the previous standalone installment and will help borrowers “quickly resolve outstanding past due and arrears through a subordinated lien with no interest,” the FHA said in a mortgage letter . (The subordinate lien must be paid back on termination of the mortgage, which is usually the case when the homeowner refinances or sells their home.)
The administration determined that the partial claim is limited to 25% of the principal balance of the borrower not paid at the time of default.
How proactive communication can reduce the risk of foreclosure
With borrowers affected by COVID-19 continuing to get out of mortgage deferral, now is the time for lenders and service providers to be proactive in contacting borrowers to reduce the volume of foreclosures.
Presented by: Computershare Loan Services
Meanwhile, the COVID-19 recovery modification option will extend the life of a mortgage to 360 months at a fixed rate while trying to reduce a borrower’s monthly principal and interest rate by 25%. This option must include a partial entitlement, if any, the FHA noted.
For calculating a borrower’s new P&I payment, the administration advises service providers to use the latest Freddie Mac Weekly Primary Mortgage Market Survey (PMMS) interest rate rounded to the nearest eight of 1%.
Department of Housing and Urban Development Secretary Marcia Fudge believes “These options provide equitable relief and recovery for FHA borrowers”
“As Americans return to work and our economy continues to recover, we are taking targeted steps to ensure homeowners financially affected by COVID-19 get the support they need to stay in their homes,” said Fudge.
Additionally, the mortgage letter states that servicers will need to review homeowners for the new COVID-19 recovery options if an existing retention option has not been completed, the homeowner was not previously eligible for a home retention option, or if the homeowner is again in default after one COVID-19 Housing Retention Option.
These changes follow a previously introduced “pre-waterfall” option for borrowers called COVID-19 Advance Loan Modification (COVID-19 ALM). Servicers need to check all borrowers for this option.
COVID-19 ALM was introduced by the administration at the beginning of July for eligible defaulting borrowers who can achieve a 25% reduction in their P&I through a 30-year installment and a change in the fixed-term loan.
The new loss mitigation options can be offered to borrowers right away, but the service providers must use the new waterfall within 90 days, the administration added.