FHA Implements New Payment Supplement Loss Mitigation Option

FHA recently released Mortgagee Letter 2024-02 which implements a new “Payment Supplement” loss mitigation option that is available on fixed-rate forward mortgage loans to borrowers who meet FHA’s requirements for loss mitigation during bankruptcy proceedings. 

Under this new option, which does not require loan modification, a standalone partial claim is used to bring the delinquent loan current.  Then, a monthly principal reduction is applied towards the amount due each month for the borrower’s principal for 36 months.  The option is memorialized by a non-interest bearing note, a subordinate mortgage, and a payment supplement agreement that is incorporated into the new note.  After the payment supplement period ends, the borrower will resume paying the full principal and interest amount monthly.  FHA recognizes the potential for payment shocks at the end of the three-year option period, and has indicated that it intends to assess this issue on an ongoing basis as the end of this period is reached to help inform future updates to loss mitigation options. 

There are a variety of requirements that must be met for this option to be available, in addition to those already discussed above.  For example, the minimum monthly principal reduction must be at least 5% of the principal and interest portion of the monthly mortgage payment as of the date the option period begins, and the minimum monthly principal reduction must be at least $20 per month as of that date.  Additionally, the mortgagee must first advance all the funds necessary to bring the mortgage current, and may only submit one claim for the payment supplement option (which must be submitted no later than 60 days after the borrower has executed the option documents described above). 

The mortgagee letter also describes a variety of related requirements, such as how the partial claim for the payment supplement may be calculated, how the funds that FHA provides for the monthly principal reduction must be segregated, and how subsequent defaults during the payment supplement period are treated.

These provisions may be implemented as of May 1, 2024, and must be implemented no later than January 1, 2025. 

Additionally, this mortgagee letter extends certain COVID-19 recovery options through April 30, 2025.