A coalition of six organizations, representing a diverse mix of mortgage lenders and borrowers, has approached the Federal Housing Administration (FHA) with an important request: to prolong the existing loss-mitigation waterfall until February 2026.
This extension is particularly important as the FHA embarks on a comprehensive review and update of its servicing handbook.
Proposed Changes to Loss-Mitigation Strategies
In late November, the FHA announced proposed changes to its long-term loss-mitigation strategies.
These modifications are informed by the valuable lessons learned from the temporary measures implemented during the COVID-19 pandemic.
Alongside this, the FHA indicated plans to extend the deadline, currently set for April 30, 2025, in response to stakeholder needs.
The coalition, which includes well-known organizations such as the American Bankers Association, Center for Responsible Lending, Housing Policy Council, and others, underscored the necessity of providing sufficient time for implementation.
They pointed out the draft handbook’s depth and complexity, which introduces new options and addresses a variety of topics.
While many aspects of the draft are already familiar to the stakeholders, a prolonged transition period is crucial for effective adaptation.
Streamlined Loss-Mitigation Process
Advocating for simplicity, the coalition strongly supports the FHA in maintaining a streamlined loss-mitigation process.
They are keen to avoid an overcomplicated system that relies heavily on documentation.
Instead, they suggest creating a consolidated approach that can effectively address multiple financial hardships—be it unemployment or natural disasters.
This would ease the burden on mortgage servicers and ensure clarity for borrowers.
The FHA’s draft proposal offers several pathways for borrowers struggling with mortgage payments, independent of their financial recovery capabilities.
Among the options presented are partial claims that stand alone, modifications that extend loan terms to 40 years, and additional partial claims to cover payment supplements.
The proposal also includes protective measures designed to help borrowers who can manage their monthly payments to keep their homes.
A notable feature is a three-month trial payment plan, which the coalition argues is a more effective alternative to the traditional full documentation process.
They believe this approach fosters better outcomes for borrowers facing challenges.
Engagement Strategies for Borrowers
Showcasing their enthusiasm, the coalition recognizes the FHA’s strategy of reducing payments, appreciating its alignment with the practices of Fannie Mae and Freddie Mac.
They referenced research indicating that targeted monthly payment reductions—which don’t require an exhaustive assessment of the borrower’s entire financial landscape—tend to lower the risk of redefault more effectively than relying solely on income-based affordability benchmarks.
These updates emerge as mortgage delinquency rates have seen an upward trend in recent quarters, which has particularly impacted the FHA portfolio.
Contributing factors include macroeconomic trends, such as natural disasters and rising property insurance expenses.
In early December, the FHA also announced new strategies to engage with borrowers in default.
This initiative allows for improved remote communication between lenders and struggling borrowers, building on successes realized during the pandemic.
With the aim of enhancing support during financial difficulties, the FHA is committed to fostering better communication and assistance.
Source: Housingwire