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Mortgage

FHA employs “waterfall method” to expand home retention measures

Administration wants the nearly 4.14 million homeowners with mortgages in forbearance to know that "they have options"

The Federal Housing Administration announced on Wednesday an expanded menu of its loss mitigation options in coordination with the U.S. Department of Housing and Urban Development’s eviction prevention and stability toolkit in an effort to help homeowners avoid foreclosure. The FHA’s loss mitigation options employ a “waterfall method” to assess a homeowner’s eligibility if they do not qualify for its COVID-19 National Emergency Standalone Partial Claim.

FHA compared the waterfall method to that of a filter, meaning when homeowners fail to meet the qualifications of servicing interventions they are moved down the waterfall of options as servicers attempt to get the borrower into a sustainable mortgage payment.

“Due to the fact that servicers are facing an unprecedented number of loss mitigation actions on the backside of this, we want to make it as easy for them as possible to get borrowers in a feasible situation on the other side of forbearance,” said a HUD official.

FHA’s COVID-19 home retention waterfall for homeowners who occupy their FHA-insured single-family residences now requires servicers to assess homeowners for the following at or before the end of their mortgage forbearance period:

  • The COVID-19 National Emergency Standalone Partial Claim takes all past due mortgage amounts and puts them in a separate, junior lien of up to 30% of the mortgage’s unpaid principal balance. This junior lien is only repayable when the mortgage ends.
  • If a homeowner does not qualify for the COVID-19 Standalone Partial Claim they are directed to the COVID-19 Owner-Occupant Loan Modification. This modifies the rate and term of the existing mortgage.
  • If a homeowner is not eligible for either of the first two solutions, they may be eligible for the COVID-19 Combination Partial Claim and Loan Modification. It allows for the use of a partial claim up to 30% of the unpaid principal balance – any other amounts owed are handled through a mortgage modification.
  • Finally, the COVID-19 FHA HAMP Combination Loan Modification and Partial Claim is for homeowners who are not eligible for any other home retention solution. It reduces the amount of documentation needed to obtain a COVID-19 FHA HAMP Combination Loan Modification and Partial Claim.

As of right now, these options are available for homeowners whose mortgages were current or less than 30 days past due as of March 1, 2020.

Subsequently, the HUD released an eviction prevention and stability toolkit to encourage Public Housing Authorities and House Choice Voucher landlords to prepare and implement strategies that will mitigate economic hardships due to COVID-19 while keeping families in their homes.

“The toolkit is composed of a PHA best practices guide, tenant brochure with tips to avoid eviction, HCV landlord flyer to encourage engagement with tenants before the moratorium expires, and repayment agreement guidance in addition to sample documents to provide increased clarity for landlords and renters utilizing the resources,” said a HUD official.

In June, the FHA extended its foreclosure and eviction moratorium through August 31, 2020, and enacted a policy shift aimed at borrowers who met all FHA requirements for a mortgage at the time of closing but were impacted by the pandemic before receiving the FHA’s endorsement for insurance on the loan. 

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