FHA Announces New COVID-19 Loss Mitigation Options for Mortgage Borrowers

FHA has expanded its loss mitigation options for homeowners affected by the coronavirus crisis.

The Federal Housing Administration (FHA), a part of the U.S. Department of Housing and Urban Development (HUD), offers protections and options to homeowners who are facing foreclosure. Under HUD policy, loan servicers must review borrowers with FHA-insured single-family mortgages who are behind in payments, or about to fall behind, for loss mitigation alternatives using what's called a "waterfall." In the waterfall process, the servicer has to, subject to a few exceptions, figure out what foreclosure alternative is appropriate for the situation. The servicer must evaluate the borrower for loss mitigation options in a specific order. Once a borrower qualifies for a particular option, the evaluation ends.

On July 8, 2020, FHA announced an expanded list of home retention alternatives to help homeowners bring their mortgage current at the end of a COVID-19 forbearance. The servicer must include these options in the waterfall process. First, the servicer must review the borrower for a COVID-19 National Emergency Standalone Partial Claim. Generally, a partial claim is an interest-free loan from HUD to get caught up on the overdue payments. The loan doesn't have to be repaid until the first mortgage is paid off. A COVID-19 National Emergency Standalone Partial Claim takes all overdue 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 repayable when the mortgage ends, which, for most borrowers, is when they sell or refinance their home.

If the homeowner doesn’t qualify for the COVID-19 National Emergency Standalone Partial Claim, the servicer must consider these additional alternatives in the following order at or before the end of the borrower’s forbearance period:

  • The COVID-19 Owner-Occupant Loan Modification. This type of loan modification alters the interest rate and term of the existing mortgage. It is for homeowners who don’t qualify for the COVID-19 National Emergency Standalone Partial Claim.
  • The COVID-19 Combination Partial Claim and Loan Modification. With this option, the homeowner gets a partial claim up to 30% of the unpaid principal balance, and any remaining amounts are dealt with in a loan modification. This option is available to homeowners who aren’t eligible for just a partial claim or modification alone.
  • The COVID-19 FHA HAMP Combination Loan Modification and Partial Claim. This option reduces the amount of documentation needed to obtain a modification and partial claim. It is available to those homeowners who aren’t eligible for any other home retention solution under the waterfall. (While the federal Home Affordable Modification Program or "HAMP" and its associated programs expired at the end of 2016, FHA still calls its main loan modification program "FHA-HAMP.")

These options are available to homeowners whose mortgages were current or less than 30 days past due as of March 1, 2020. In addition, FHA has imposed a foreclosure and eviction moratorium through August 31, 2020.

Effective date: July 8, 2020