A strategy floated by the Federal Housing Administration as a way to lower the payments of troubled borrowers even when current rates are higher than theirs could work with adjustments, some groups say.
“The [payment supplement partial claim], while straightforward in theory and conceptual design, is unnecessarily complex,” three associations said in a letter sent to the administration on June 30.
In a partial claim, borrowers can push some of their first-mortgage obligations into a second-lien loan that can be repaid later. The PSPC applies that in such a way that loan terms can be temporarily modified below market rates if borrowers have a hardship.
The Mortgage Bankers Association and two other groups said changes that would lower costs and liabilities in addition to removing operational burdens for stakeholders could simplify the process of doing this and make it more viable.
The FHA has been working to streamline some of its foreclosure prevention options in line with positive outcomes with forbearance during the pandemic, so it may be open to more, particularly given that the Consumer Financial Protection Bureau also is encouraging it.
Adjustments the MBA, the American Bankers Association, the Five Star Institute’s trade group and their members would like to see include limiting the term of the temporary payment reduction to a straightforward three years.
This would be be preferable to one that could be extended up to five years with a graduated payment because it would put less strain on the FHA’s insurance fund and would be simpler, they said.
Also a mandatory implementation period set for 12 months after finalization would help ensure servicers had enough time to gear up, review and negotiate a better understanding of the legal contracts that would govern the new partial claim, in addition to their responsibilities for it.
“Several aspects of the draft [mortgagee] letter are inconsistent with the traditional fixed-amount structure of an ordinary partial claim,” the associations said, noting that they’d like to see a statement holding the industry responsible for the enforceability of the contracts removed.
The groups said they’d also like to increase the servicer incentive to $3,500 from $1,000 as they work to ensure the availability of funds for operations that include advances on behalf of distressed borrowers.