The Federal Housing Administration is floating the idea of working collaboratively with servicers to explore offering a new type of partial claim that is more similar to Fannie Mae and Freddie Mac's equivalent.

Although the use of this type of distressed borrower assistance has become less prominent as the FHA has transitioned away from pandemic leniencies, the partial claim still comes into play in certain situations, including when a borrower is eligible for a payment supplement.

The "reinstatement advance payment" that the Department of Housing and Urban Development affiliate seeks to test is aimed at allowing distressed borrowers to defer part of their obligation without a subordinate lien and requiring servicers to obtain and record a note.

"Participation in the RAP demonstration would be voluntary and all mortgagees would be eligible to participate," the administration said in an information bulletin announcing acting Commissioner Joseph Gormley's draft mortgagee letter.

Gormley, who also is the president of Ginnie Mae, is performing the commissioner's delegable duties while FHA looks to replace Frank Cassidy. Cassidy recently left to take a job in the private sector closer to his family and young child amid a relocation of HUD's headquarters.

RAP incentives and requirements

The proposed RAP demonstration would have many detailed requirements that HUD describes in a 41-page draft mortgagee letter. The general concept involves replacing the partial claim with a servicing advance that bears no interest and is secured by the first mortgage.

Mortgagees would be eligible for a range of financial incentives and up to $250 in title expense reimbursement, when required, if they file for these within 60 days of when the RAP gets executed. A title expense may be incurred to assess the enforceability of the first lien.

Incentives would range from $500 for a standard partial claim RAP to $1,750 for a payment supplement. RAP used in conjunction with a loan modification would have a $750 incentive.

Servicers that volunteer to participate in testing the RAP option would need to ensure the vast majority of their submissions and remittances of repayment balances are timely, with lateness in either category above a 5% benchmark in a 12 month period triggering suspension. 

Remittances would need to be submitted within 30 days of the repayment date. Executed RAP agreements would have to be uploaded in the single-family insurance system within 60 days of claim payment.

Any of the following triggers repayment: first lien maturity, any sale or transfer of the property not involving an assumption, refinances (other than those that remain enforceable or are streamline refis), primary mortgage payoffs or FHA insurance termination.

If borrowers run into difficulty immediately satisfying an obligation at maturity, their RAP would enter what the administration calls the "terms of repayment" process.

Servicers would need to notify borrowers that their RAP is coming due 180 days before maturity and let them know repayment plans are available. A repayment plan would have to be offered no later than 45 days before maturity. 

Borrowers with balances below $5,000 or less would get a maximum of 18 months to pay. Those owing $5,000-$15,000 would have up to three years. If the consumer has an obligation  above $15,000, the maximum term for repayment would be four years.

If the borrower enters what the administration calls a RAPTOR plan, mortgage companies would be able to either service the loans themselves or assign the debt to the department with 15 days of maturity.

Servicers would be able to request HUD discharge the debt if they can't collect it. The circumstances would have to be documented and submitted with the request.

The proposed partial-claim alternative would be tested for five years if the proposal moves forward. The FHA will accept feedback on the concept through Sept. 3 that it will consider in deciding whether to greenlight the demonstration project.