FHA Introduces Payment Supplement

The Federal Housing Administration (FHA) has announced the introduction of the Payment Supplement, a new loss mitigation home retention option.

The Payment Supplement will temporarily reduce the borrower’s monthly mortgage payment by up to 25% for three years, without requiring the mortgage to be modified.

The option will be available to borrowers who have FHA-insured single-family forward mortgages and are falling behind on their mortgage payments.

The FHA established the new option as it recognized the FHA Recovery Modification could no longer reliably provide payment reduction to borrowers who face hardship, due to elevated interest rates since 2022.

Mortgage servicers will be able to reduce a borrower’s mortgage payment by using funds from a partial claim, which are interest-free loans from the US Department of Housing and Urban Development (HUD).

This will enable the borrower to access up to 30% of the outstanding balance of their FHA mortgage.

The partial claim amount would be placed in a junior lien and paid back when the homeowner sells or refinances the home, or the mortgage otherwise terminates.

Marcia Fudge, secretary of HUD, said:  “HUD uses every tool in our toolkit to ensure we can help struggling borrowers avoid foreclosure. Today’s new policy will enable the families we serve to get back on their feet while staying in their homes.”

Mortgage servicers can begin implementing the payment supplement from May 1, 2024, but must then implement the solution for all eligible borrowers by January 1, 2025.

The FHA has also extended its full suite of temporary loss mitigation options, which were originally developed as COVID-19 recovery measures.

According to the FHA, the option has proven to be very successful in helping borrowers who cannot afford to resume their previous mortgage payments.

The option is available to mortgage servicers for all borrowers who are behind on their mortgage payments, regardless of the reason for their hardship.

The option was originally set to expire on October 30, 2024, but has been extended to April 30, 2025.