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  • Writer's pictureQC Verify

Default in a Higher Interest Rate Environment. Part 1 – The New FHA Payment Supplement

As we move into the month of July, celebrating Independence Day, it’s a perfect time to reflect on what it means to live in this valued country of ours.  No matter what the obstacles are, in the long run we persevere and overcome them. The mortgage industry is a great example of this perseverance, as we continue to deliver and support homeownership through extensive regulatory, economic, and even medical health volatility. One of the latest hurdles is contending with a higher interest rate environment just a few short years after experiencing historic lows.  Today’s rates continue to linger at well over double the all-time low interest rates experienced in 2021.

 

The question in today’s market is, what happens as borrowers with historically low interest rates begin to experience difficulties in making their payments, a situation that is increasing in the midst of higher inflation and unemployment rates.  Distressed homeowners are often seeing bankruptcy as their only option as post-financial crisis and pandemic loss mitigation programs fail to provide relief in the current interest rate environment.

 

Helping defaulting homeowners deal with the impact of elevated interest rates is creating a new challenge for mortgage servicing loss mitigation teams.  This impact could escalate rampantly if effective measures are not put in place promptly.  In an effort to carefully analyze and strategize how our industry can best assist delinquent homeowners, QC Verify is posting a two-part blog series, entitled “Default in a Higher Interest Rate Environment”:

·         Part 1 will take a clear look at the Federal Housing Administration’s (FHA’s) new Payment Supplement Program.

·         Part 2 will dig deeper into related areas of vulnerability for mortgage servicers as interest rates continue to trickle downward.

Our goal is to provide relevant solutions to today’s mortgage obstacles through innovative approaches to audit, quality control, and due diligence. To accomplish this and help position positive loss mitigation outcomes for both servicers and homeowners, QC Verify considers how the FHA’s new Payment Supplement solution can help right course loss mitigation options in the current interest rate environment.

 

Spotlight on FHA’s New Payment Supplement   

 

Published under Mortgagee Letter 2024-02 back in February, the U.S. Department of Housing and Urban Development (HUD) established the FHA Payment Supplement loss mitigation option for implementation as early as May 1, 2024, with full implementation required by January 1, 2025. Destined to become a permanent fixture in the FHA loss mitigation toolbox and waterfall, there are a few important program requirements that you’ll need to become familiar with

 

Calculating a Payment Supplement:

ü  The Payment Supplement Agreement (PSA) can lower a principal and interest payment as much as 25 percent.

ü  A partial claim is used to create the Payment Supplement.

ü  The calculation for the PSA takes the unpaid principal balance (UPB) at the time of initial partial claim or as of the date of default.

ü  The applicable UPB is then multiplied by 30 percent, and any previous partial claims are subtracted.

ü  The total amount of funds needed to bring the mortgage current is subtracted from available partial claim monies in order to calculate the Monthly Principal Reduction (MoPR) payment.

ü  Next the lesser of the principal only payment on the date of PSA implementation and 25 percent of the monthly P&I payment is multiplied by 36 months in order to determine the three years maximum MoPR.

ü  The minimum MoPR must be greater than or equal to five percent of the current P&I payment (also > $20).

ü  A temporary payment is determined that includes principal, interest, taxes, and insurance (PITI), as well as any servicer advances, and net the reduction to principal funded by the MoPR.

 

Eligibility & Servicing Payment Supplements:

¨       Available on fixed rate mortgages where the borrower(s) has not already accessed their full partial claim allowance, and payment has not been made in 61+ days.

¨       The PSA creates a temporary reduction to the mortgage payment for up to three years; it is not a payment modification.

¨       After the reduction period ends the borrower will again pay the full monthly P&I payment.

¨       Utilizing available partial claim funds, a zero-interest subordinate lien is created directly between HUD and the delinquent borrower.

¨       This lien is enforceable and legally binding by a zero-interest Note, subordinate Mortgage, and the PSA.

¨       The subordinate lien is not required to be paid off until time of refinance or sale of the property; in the interim it is serviced by HUD.

¨       If servicing is transferred, the Payment Supplement remains intact and must be reported.

¨       Mortgages in a Payment Supplement period are required to be reported on the last day of the month as a separate delinquency class under default servicing activities.

 

Reducing Risk Amidst Implementation

 

Implementing the FHA Payment Supplement option, as with any new program rollout, involves myriads of calculations, rules, and specifications that your loss mitigation team will need to become intimately familiar with before yearend. At QC Verify, our focus is to help you ensure that program requirements are fulfilled within your organization.  Does your loss mitigation team know when and how to offer the Payment Supplement option to distressed homeowners?

 

QC Verify assists with the downstream nuances and risk associated not only with new programs but existing loss mitigation solutions.  Through automation, combined with personal guidance provided by experienced individuals, we help to ensure that selected homeowners are eligible and more importantly that this eligibility is properly documented, corresponding disclosures, new and old, have been issued on a timely basis, and much more.  By coupling automation with experience, our audit, QC and due diligence processes identify errors, exceptions, trending, and risk exposure, as well as providing practical resolution that is designed to meet your company’s unique needs and demands.

 

QC Verify assists your loss mitigation team in understanding the intent and implications of industry programs, fostering greater efficiencies, timely delivery of communications, and accurate accumulation and use of data and information. We help you embrace program changes, not just tell you what’s changed.

 

Experience the distinction that a meaningful QC partnership can make as new product deadlines approach. Visit us at QCVerify.com to learn more about sophisticated technology with a human touch.

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