FHA Announces New Loss Mitigation Payment Supplement Option

Amidst record-level interest rates, on February 21, 2024, the Federal Housing Administration (FHA) announced a new loss mitigation option, the Payment Supplement, to aid struggling borrowers. The Payment Supplement will bring a borrower’s mortgage current, as well as provide a temporary reduction in the borrower’s monthly principal mortgage payment for a term of three years.

As part of the Payment Supplement, and consistent with HUD’s statutory partial claim authority under the National Housing Act, partial claim funds will be applied to a borrower’s mortgage balance (or arrearage) in order to bring the mortgage current. The Payment Supplement remains subject to statutory maximums established for partial claims. For instance, if the amount needed to bring a borrower’s mortgage current is greater than the statutory maximum, the borrower is not eligible for the Payment Supplement and must be offered another COVID-19 Recovery Modification option.

Borrowers receiving a Payment Supplement will also receive a Monthly Principal Reduction (MoPR) to cover a portion of the mortgage principal due, thus temporarily reducing the borrower’s monthly mortgage payment. The Minimum Monthly Principal Reduction (Minimum MoPR) must be equal to or greater than 5% of the principal and interest (P&I) portion of the borrower’s monthly mortgage payment as of the date the Payment Supplement period begins. The Minimum MoPR must also be at least $20 per month at the start of the Payment Supplement period. The maximum MoPR is the lesser of a 25% P&I reduction for 36 months, or the principal portion of the monthly mortgage payment at the start of the Payment Supplement period. After the Payment Supplement period ends, the borrower will be required to resume paying the full monthly principal and interest on the mortgage.

The Payment Supplement will be evidenced by an interest-free note and subordinate mortgage, along with a Payment Supplement Agreement. Repayment of the note and subordinate mortgage is not required until the mortgage matures, the property is sold or transferred, the mortgage is paid off, or FHA insurance on the mortgage is terminated.

The new Payment Supplement is applicable to all FHA Title II single family forward mortgage programs. However, to be eligible the following are required:

• The mortgage is a fixed-rate mortgage;
• There are adequate partial claim funds to both bring the mortgage current and cover the MoPR as determined in the Payment Supplement calculations;
• If the borrower is in an active bankruptcy proceeding, the borrower must meet established requirements for loss mitigation during bankruptcy proceedings provided under Handbook 400.1 Section III.A.2.i.viii;
• After the mortgage is bought current, the principal portion of the borrower’s first monthly mortgage payment must be greater than or equal to the Minimum MoPR; and
• The borrower indicates that they have the ability to pay the reduced mortgage payment.

Further, HUD plans to permanently include the new Payment Supplement as part of FHA’s loss mitigation options and will incorporate the necessary language in an update to FHA Single Family Housing Policy Handbook 4000.1.

Those policy changes related to the Payment Supplement that will be incorporated into Handbook 4000.1 include the following servicing and reporting requirements:

• Maintenance of Payment Supplement Account – Mortgagees must segregate Payment Supplement funds in an insured account.
• Providing Payoff Statements – Unlike traditional partial claims, for which a mortgagee simply needs to notify HUD when a borrower submits a request for a payoff statement, mortgagees must provide payoff statements for the Payment Supplement account.
• Providing Borrower Disclosures – Mortgagees must provide annual account statements for the Payment Supplement account, as well as a notice between 60 and 90 days before the borrower resumes his/her regular monthly mortgage payments after the expiration of the three-year Payment Supplement period.
• Responsibility During Transfers of Servicing Rights – A requirement that a transferee servicing mortgagee ensures the transfer of any outstanding Payment Supplement account serving records. The transferee servicing mortgagee is also responsible for (1) all servicing actions associated with the Payment Supplement, (2) obtaining the complete Payment Supplement file, and (3) obtaining any outstanding Payment Supplement account funds.
• Single Family Default Monitoring System Default Reporting – Mortgagees are also required to report default servicing activities for all mortgages in a Payment Supplement period.

We encourage mortgagees to read Mortgagee Letter 2024-02 to learn more about the new Payment Supplement, including required documentation and borrower disclosures. Implementation of the Payment Supplement may commence as early as May 1, 2024, but must be in effect no later than January 1, 2025.