Biden Administration Adds More Protections for Mortgage Payers

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Federal Mortgage Agencies Take Steps to Reduce Likelihood of Foreclosure Boom

The fallout from the COVID-19 pandemic and its corresponding policies is still unknown. The housing market is booming despite the loss of millions of jobs and billions in earnings. Millions of homeowners would be on the brink of foreclosure if not for precautions taken during the Trump administration to assist homeowners whose incomes were impacted by the pandemic shutdown. Biden’s administration has extended his predecessor’s policies, expanded some, and created more.

This past week the White House Briefing Room announced additional measures meant to stave off a flood of foreclosures while American homeowners get back on their feet. The Department of Housing and Urban Development (HUD), which powers millions of FHA loans, Department of Agriculture (USDA), and Veterans Affairs (VA) will offer loan modifications and payment reductions to make mortgage payments more affordable for those who meet agency requirements.

What is loss mitigation?

When a mortgage lender faces a situation where the borrower cannot repay, the lender must consider their options. There is always foreclosure, which takes resources. Time, money, labor, attorneys, etc. and culminates with a physical asset (a house) on their balance sheet. Loss mitigation is a fancy way of saying “cut your losses”.

The CFPB previously announced lender requirements to modify loans to prevent foreclosures. Interest rate, term, and principal reductions are all forms of loss mitigation banks and mortgage lenders use to minimize losses when a large group of homeowners default. The recent announcement by HUD, USDA, and VA extends such measures to the respective government backed mortgage programs.

FHA Loan Options

In addition to existing COVID-19 protections implemented over the last year, HUD introduced two new ways to continue paying your FHA loan.

COVID-19 Recovery Standalone Partial Claim

If your FHA loan is in forbearance and you are able to resume your regular monthly payments, HUD will provide an interest free subordinated loan (a second mortgage) that must be repaid when the FHA loan is paid off, including selling the home or refinancing. Your existing FHA payment, interest rate, and loan term remain the same.

COVID-19 Recovery Modification

For FHA homeowners who are unable to resume their original loan payments, HUD will extend the existing term out to 30 years with a current market interest rate. The aim is to reduce the mortgage payment by 25%. While a 25% payment reduction may not be adequate for all borrowers, HUD believes it will reduce the number of FHA loans entering foreclosure dramatically.

USDA Loan Options

USDA COVID-19 Special Relief Measure

Similar to what HUD is doing with FHA loans, USDA will attempt to reduce USDA loan payments by 20% using as many as three modifications.

The initial attempt at reducing the monthly payment is an interest rate adjustment. If the lower rate does not lower the payment enough, a term extension is added. Finally, if rate and term adjustments are not sufficient enough to reduce the payment 20%, USDA is offering a mortgage recovery advance to assist in covering past due amounts and related costs.

Suggested Resource: Calculate Your USDA Loan

VA Loan Options

VA COVID-19 Refund Modification

The VA options available to VA borrowers in forbearance expand on the policies established by FHA and USDA. In order to achieve a 20% reduction in monthly principal and interest payments, VA will buy up to 30% of the homeowner’s principal balance and issue a subordinate lien (a second mortgage) at 0% interest that must be repaid when the VA loan is terminated, either through maturity, selling the home, or refinancing.

In addition to the no interest principal reduction, if necessary, the 10 years may be added to the original loan term when modifying the loan. The new VA loan payment would then be amortized over 480 months (40 years) on loans originated with 30 year terms.

For more information, including deadlines and relief options, visit the CFPB website.

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