Updated loss mitigation options will help borrowers struggling with their mortgage payments to avoid foreclosure.
Today, the Federal Housing Administration (FHA) is announcing that it is expanding and enhancing its set of loss mitigation options used to help borrowers struggling to make mortgage payments on their FHA-insured mortgages. The enhancements extend FHA’s highly effective COVID-19 loss mitigation options to all eligible borrowers who fall behind on their mortgage payments, regardless of the cause of their delinquency. The updates also enable mortgage servicers to use the full 30 percent of FHA’s partial claim option, rather than the previously permitted 25 percent, to help maximize the number of borrowers able to retain their homes. The mandatory effective date of the changes is April 30, 2023, but mortgage servicers may begin offering these options to borrowers immediately.
“We are committed to ensuring that no FHA borrower experiences foreclosure unnecessarily,” said Assistant Secretary for Housing and Federal Housing Commissioner Julia Gordon. “FHA’s COVID-19 forbearances and streamlined COVID-19 loss mitigation options have successfully helped millions of struggling borrowers in the last two fiscal years alone. Our action today lets us capitalize on what we have learned through the pandemic to continue helping borrowers avoid foreclosure, regardless of the nature of their hardship.”
The specifics of the policy changes are as follows. For all FHA-insured Single Family Title II forward mortgages, FHA will:
- Extend temporary COVID-19 Recovery loss mitigation options to all eligible borrowers, including non-occupant borrowers, regardless of the nature of their hardship. Servicers must assess all borrowers who are in default or who are at risk of defaulting (imminent default) using FHA’s COVID-19 Recovery loss mitigation “waterfall” of options.
- Update the Partial Claim components of both FHA’s COVID-19 Recovery Standalone Partial Claim and the COVID-19 Recovery Modification by raising the maximum partial claim amount from 25 percent of the mortgage’s unpaid principal balance to the maximum 30 percent allowed by statute. This increase will help more borrowers who cannot return to making their current mortgage payments to reduce their mortgage balance to a level that permits them to achieve a target payment reduction of at least 25 percent despite today’s higher interest rates.
- Extend the availability of FHA’s COVID-19 Recovery loss mitigation options for 18 months past the April 30, 2023, mandatory effective date for servicers. The temporary COVID-19 Recovery options were previously scheduled to expire at the official end of the COVID-19 National Emergency. This change removes the uncertainties associated with the timing of the end of the National Emergency.
- Expand the definition of imminent default to include borrowers who qualified for or used U.S. Department of the Treasury’s Homeowner Assistance Funds (HAF). With this change, servicers will be able to offer loss mitigation options to borrowers who qualified for or used HAF funds and may no longer technically be delinquent but require further assistance to avoid redefault.
- Provide incentive payments to servicers for the successful completion of COVID-19 Recovery options. Incentive payments are part of FHA’s standard loss mitigation options but are not currently available to servicers for COVID-19 Recovery options. These incentives will help to compensate servicers for the cost and effort of assisting borrowers with COVID-19 Recovery loss mitigation options.
To simplify loss mitigation options for servicers and facilitate the transition to the COVID-19 Recovery loss mitigation options for all eligible borrowers, FHA is temporarily suspending the use of its FHA-Home Affordable Modification (FHA-HAMP) options concurrent with today’s Mortgagee Letter.
From the start of fiscal year 2021 through November 30, 2022, more than one million borrowers have obtained an FHA loss mitigation home retention option to help them return to sustainable mortgage payments and avoid foreclosure. FHA’s loss mitigation work has significantly reduced FHA’s serious delinquency rate – those mortgages where the borrower is 90 or more days past due on their mortgage payments – to 4.79 percent as of November 30, 2022. In November 2021, FHA’s serious delinquency rate was 7.83 percent, and at its highest point in November 2020, this rate was 11.90 percent.
Additional Information About FHA’s Loss Mitigation Options
and Changes Effective April 30, 2023
Relief and recovery options available through mortgage servicers to all eligible borrowers struggling to make their mortgage payments are in the table below.
|Relief Options Before Use of COVID-19 Recovery Loss Mitigation Options|
Formal or Informal Forbearance
A temporary pause or reduction in mortgage payments. Mortgage servicers can offer struggling borrowers formal or informal forbearance. Formal forbearance plans are written agreements that can allow for reduced or suspended payments for up to six months. Informal forbearance is an oral agreement between the servicer and the borrower that allows for reduced or suspended payments for three months or less. Special forbearance options are available for borrowers who are unemployed and for borrowers affected by a Presidentially Declared Major Disaster Area.
COVID-19 Advance Loan Modification (ALM)
Available to owner-occupant and non-occupant borrowers, the COVID-19 ALM is a permanent change in one or more terms of a borrower’s mortgage that achieves a minimum 25 percent reduction to the borrower’s monthly principal & interest (P&I) payment. It does not require borrower contact, as servicers assess eligibility using available loan information and proactively mail the modified mortgage documents to borrowers for whom the modification can achieve the required payment reduction.
COVID-19 Recovery Loss Mitigation Home Retention Options
COVID-19 Recovery Standalone Partial Claim
For borrowers who can resume making their current mortgage payments, the COVID-19 Recovery Standalone Partial Claim allows mortgage payment arrearages to be placed in a zero-interest subordinate lien against the property. The Partial Claim second lien does not require payment until the last mortgage payment is made, the loan is refinanced, or the property is sold, whichever occurs first. Effective April 30, 2023, the partial claim cap for this option is 30 percent of the unpaid principal balance of the mortgage.
COVID-19 Recovery Modification
For homeowners who cannot resume making their current monthly mortgage payments, the COVID-19 Recovery Modification extends the term of the mortgage to 30 or 40 years at a fixed rate and targets a reduction of the principal and interest portion of the borrower’s monthly mortgage payment by 25 percent. The COVID-19 Recovery Modification includes the use of a partial claim, if available, to resolve outstanding arrearages. Effective April 30, 2023, the partial claim cap for this option is 30 percent of the unpaid principal balance of the mortgage.
COVID-19 Recovery Loss Mitigation Disposition Options
COVID-19 Pre-foreclosure Sale
If the borrower does not qualify for any of the COVID-19 Home Retention Options and wishes to sell the property but the property sales value is not enough to pay the loan in full, the servicer may be able to accept less than the full amount owed by approving eligible borrowers for a Pre-Foreclosure Sale, also known as a short sale.
COVID-19 Deed-in-Lieu of Foreclosure
If the borrower is unable to complete a COVID-19 Pre-foreclosure sale (PFS) transaction at the expiration of the PFS marketing period, they may be able to voluntarily offer the deed for the property to HUD in exchange for a release from all obligations under the mortgage.
From the beginning of fiscal year 2021 through November 30, 2022, more than one million borrowers have obtained a loss mitigation home retention option through their mortgage servicer, as follows:
|Number Completed FY 2023|
(As of 11/30/22)
|Advance Loan Modifications (ALM)||1,287||32,660||998||34,945|
|COVID-19 Recovery Standalone Partial Claim||312,527||246,118||31,838||590,483|
|COVID-19 Recovery Modifications||94||147,950||11,085||159,129|
|Standalone Modifications (No Partial Claim)||98,313||49,227||739||148,279|