What you need to know: The FHA’s Payment Supplement

During the COVID-19 pandemic, when rates remained low, the FHA streamlined its home retention loss mitigation options and provided relief for nearly 1.9 million borrowers. Despite these efforts, the current climate of high mortgage interest rates poses challenges for initiating loan modifications.

To address this, the FHA introduced the Payment Supplement in Mortgagee Letter 2024-02 and related documents on February 21, 2024. Designed to help homeowners who are unable to achieve a sustainable monthly mortgage payment reduction under existing FHA loss mitigation programs, the Payment Supplement supports temporarily reducing the principal portion of the monthly mortgage payment for three years without modifying the mortgage.

The Payment Supplement is the last option in the home retention waterfall. Borrowers must have Partial Claim funds remaining to both cure the arrearage and fund the Monthly Payment Reduction for three years. Funds provided under the Payment Supplement are secured by a zero-interest bearing note and mortgage payable to HUD.

Mortgage servicers can begin implementing the Payment Supplement on May 1, 2024, with a deadline for full implementation by January 1, 2025. HUD will pay the servicer a $1,750 incentive fee through the claims process.

Furthermore, the FHA announced that it will extend its full suite of COVID-19 Recovery Loss Mitigation Options, including the Payment Supplement, through April 30, 2025.

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