Farewell, COVID-19 loss mitigation waterfall

The relaxed COVID-era waterfall will remain in place through Sept. 30 for all Title II single-family forward mortgage programs. The raft of full rescissions to COVID-era loss mitigation practices will go into effect on Oct. 1.

Changes come due to increased risk to MMI Fund, FHA says

These changes also come with a more wide-ranging review of all FHA loss mitigation practices, as the Trump administration undertakes a review of the impact to the Mutual Mortgage Insurance (MMI) Fund.

Additionally, FHA will also review what it sees as the solvency of FHA’s payment supplement loss mitigation tool, announced by the agency in February 2024 and originally “designed to help additional borrowers avoid foreclosure and retain their homes when other FHA home retention options are unable to generate a sustainable monthly mortgage payment reduction.”

Now, FHA will conduct an overall evaluation of this tool, to determine if it should remain in the loss mitigation program.

Loss mitigation tools for the pandemic were implemented on an emergency basis, the agency said, and were never intended to be permanent additions to the waterfall. But many of these provisions have remained in place for years, which has introduced additional risk to FHA programs, the agency said.

“FHA’s prior failure to definitively sunset the COVID-19 emergency loss mitigation ‘waterfall’ has increased risk in the MMIF, hurt taxpayers, set up many FHA borrowers for failure, and enabled other FHA borrowers to abuse the current process,” FHA said in its announcement of the ML.

To address these elevated risks to taxpayers and the Fund and in an effort to “improve borrower outcomes, the FHA, through today’s ML, is limiting borrower eligibility for receipt of any permanent home retention loss mitigation option to once every 24 months.”

The agency said this safeguard aligns with FHA-Home Affordable Modification Program Options (FHA-HAMP) standards, and “represents a return to the prudent risk management approach FHA observed prior to the outbreak of COVID-19.”

Rationale for changes

Following the publication of a new permanent set of loss mitigation tools this past January, “HUD has determined additional changes are necessary to protect the MMIF,” the ML explained.

“HUD continues to see increased default rates on the COVID-19 Recovery Options, as well as the use of the COVID-19 Recovery Options in a manner inconsistent with prudent management of the MMIF.”

Addressing both of these issues requires that borrowers “should be limited to one permanent loss mitigation option every 24 months versus every 18 months,” and HUD has also determined “that certain language access provisions are unnecessarily burdensome. Accordingly, they should be removed.”

Additionally, HUD says that some compensations that would be paid to borrowers under the new set of loss mitigation home disposition options and the Cash for Keys program “are not cost effective and will be maintained at the existing amounts.”

But the administration will continue to conduct a review of the full FHA permanent loss mitigation waterfall to verify that the associated policies prevent foreclosures while “protecting taxpayers and mitigating financial risks to the MMIF,” the agency said. “FHA will continue to review how the available home retention options could be improved to better incent reperformance and ensure borrower ability-to-repay.”