HUD Announces FHA Loan Payment Supplement Loss Mitigation Program

Ballard Spahr LLP

Ballard Spahr LLP

The U.S. Department of Housing and Urban Development (HUD) recently announced a Payment Supplement loss mitigation program for Federal Housing Administration (FHA) insured Title 2 mortgage loans, the details of which are set forth in Mortgagee Letter 2024-02. Mortgage servicers may begin implementing the Payment Supplement on May 1, 2024, but must implement the solution for all eligible borrowers by January 1, 2025.

In the press release announcing the Payment Supplement, Federal Housing Commissioner Julia Gordon stated that “FHA developed this innovative tool because after interest rates rose the FHA Recovery Modification could no longer reliably provide payment reduction to borrowers facing a hardship.” The press release also provides that FHA is “extending its full suite of temporary loss mitigation options through April 30, 2025.” The options were scheduled to expire on October 30, 2024.

The Payment Supplement option combines a standalone Partial Claim to bring the mortgage loan current with a new Monthly Principal Reduction (MoPR) that will reduce the borrower’s monthly principal payment for a three-year period, without requiring a modification of the mortgage loan. Servicers may submit to HUD a claim for an incentive of $1,750 following the implementation of a Payment Supplement.

The servicer must first assess if the applicable target payment reduction can be achieved under other available loss mitigation options for FHA-insured loans. If not, then the servicer must review the borrower for a Payment Supplement. Servicers may not charge borrowers any additional fees or interest for the Payment Supplement. Additionally, servicers must waive all late charges and penalties, except that servicers are not required to waive late charges and penalties, if any, accumulated prior to March 1, 2020.

The servicer must ensure that the following eligibility requirements are met:

  • The mortgage is a fixed rate mortgage;
  • Sufficient Partial Claim funds are available to bring the mortgage current and to fund the MoPR as determined in the Payment Supplement Calculations that are set forth in the Mortgagee Letter;
  • The borrower meets the requirements for loss mitigation during bankruptcy proceedings, as applicable;
  • The principal portion of the borrower’s first monthly mortgage payment after the mortgage is brought current will be greater than or equal to the minimum MoPR; and
  • The borrower indicates they have the ability to make the borrower’s portion of the monthly mortgage payment.

Servicers will not be required to obtain income documentation to determine the borrower’s Payment Supplement. The minimum MoPR must be at least 5% of the monthly principal and interest payment, and no less than $20. The maximum MoPR is the lesser of a 25% principal and interest payment reduction for 36 months, or the principal portion of the monthly mortgage payment as of the date the Payment Supplement Period begins.

The funds for the Payment Supplement must be kept in a Payment Supplement Account that is a separate, non-interest bearing, insured custodial account and that is clearly marked as holding funds for the Payment Supplement. The funds must be kept separate from funds associated with the FHA-insured first mortgage, including escrow funds. While servicers are not prohibited from holding MoPR funds for multiple mortgages in a single account, servicers may not commingle funds in the Payment Supplement Account, even temporarily, with any funds held in accounts restricted by agreements with Ginnie Mae, escrow funds, or funds used for the mortgagee’s general operating purposes or any other purpose. The servicer and borrower have no discretion in the use and application of the funds in the Payment Supplement Account.

Servicers must first advance funds for all amounts needed to bring the mortgage current, and then must submit the claim for the Payment Supplement no later than 60 days after the date of execution of the Payment Supplement Documents by the borrower. The claim must include:

  • All amounts needed to bring the mortgage current before the start of the Payment Supplement Period; and
  • The total amount required for all estimated MoPR payments for the full Payment Supplement Period.

For each month of the Payment Supplement Period, the servicer must only disburse funds from the Payment Supplement Account to apply the MoPR to the principal portion of the monthly mortgage payment after the servicer has received and accepted, at a minimum, the borrower’s portion of the monthly mortgage payment. If the borrower pays an amount that is more than their portion of the monthly mortgage payment, the additional funds must not be comingled with the MoPR or funds held in the Payment Supplement Account. Additionally, the servicer must not recalculate the MoPR during the Payment Supplement Period.

The Payment Supplement is implemented with a non-interest bearing note payable to HUD, a subordinate mortgage and a Payment Supplement Agreement. The note and subordinate mortgage do not require repayment until the maturity of the first mortgage, the sale or transfer of the property, the payoff of the mortgage, or the termination of FHA insurance on the mortgage. The Payment Supplement is non-transferrable and not assignable to a new borrower.

Servicers must send the borrower specified written disclosures annually and between 60 and 90 days before the expiration of the Payment Supplement Period. Servicers may develop specific disclosure documents or may use or modify FHA’s model Annual Payment Supplement Disclosure and Final Payment Supplement Disclosure documents. Servicers also must issue Payment Supplement payoff statements upon request, and when the servicer receives a payoff request for the borrower’s first mortgage.

The Mortgagee Letter addresses several topics regarding the Payment Supplement, including:

  • Various calculations that servicers must perform with regard to the Payment Supplement, including when the first mortgage is subject to an interest rate buydown arrangement or is affected by the protections under the Servicemembers Civil Relief Act.
  • Documentation and document delivery requirements.
  • Additional requirements for the Payment Supplement Account.
  • Various requirements to report to HUD in connection with a loan subject to a Payment Supplement.
  • Servicer responsibilities if the borrower becomes delinquent during the Payment Supplement Period.
  • Early termination of the Payment Supplement.
  • Final accounting of the Payment Supplement.
  • The responsibility of servicers when the servicing for a loan subject to a Payment Supplement is transferred.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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