Revised FHA Forbearance Exit Options
During the week of July 19, FHA published a revised version of loss mitigation options for borrowers coming to the end of their forbearance period. FHA terminated the old framework. Now, FHA offers two options. First, a COVID-19 recovery standalone partial claim for borrowers who can resume making payments on the mortgage. Second a COVID-19 recovery modification option for borrowers who can’t. These revised FHA forbearance exit options clarify how to help borrowers exit forbearance.
What is a Partial Claim? The borrower does not need to know this. A Partial Claim represents the lender asking FHA pays part of the loan amount to the lender in the form of a Partial Claim of MIP. Borrowers pay monthly Mortgage Insurance Premiums (MIP) to FHA. FHA use MIP to guarantee the timely payment of principal and interest to the lender. The Partial Claim represents the amount the FHA pays for the unpaid payments which go to make up the subordinate (2nd) lien. The lender repays to FHA any recovery of the Partial Claim at the sale or refinancing.
Exit Options
The recovery standalone partial claim first option goes to borrowers who can resume making their payments. The borrower resumes normal payments. Lenders bundle unpaid payments and delinquent amounts into a zero-interest subordinate lien. The subordinate lien has no monthly payments. However, the borrower repays the subordinate lien when the mortgage terminates. A mortgage usually terminates when the home owner refinances or sells their home. As a result, the borrower may pay more than the original loan amount in total. Overall, the partial claim is limited to 25% of the borrower’s unpaid principal balance on the date of default.
The COVID-19 recovery modification option will extend the terms of a mortgage to 360 months at a fixed rate. It also attempts to decrease a borrower’s monthly principal and interest by 25%. This option must include a partial claim, if available. The lender re-calculates a monthly payment of principal and interest (P&I) based on FHA guidelines.
Servicers/lenders must review homeowners for the new COVID-19 recovery options. Additionally, servicers must review circumstances where borrowers did not complete an existing retention option. FHA requires review where the home owner was previously ineligible for a home retention option. And finally, FHA requires review if the home owner has re-defaulted.
In summary, these revised FHA forbearance exit options only clarify how to help borrowers exit forbearance. They do not add to the existing tools of lenders and servicers. Read Winning Mortgage, Winning Home to determine your appropriate mortgage and mortgage amount.