For government mortgage loan programs (FHA, VA, USDA), the Biden administration is seeking to provide a 20%-25% reduction in mortgage payments to homeowners still in distress after the COVID-19 pandemic.
On July 23, 2021, the White House released a preliminary plan that would use a combination of existing and new tools such as zero-interest second mortgages, longer loan terms, and interest rate reductions to help homeowners avoid foreclosure.
The announcement comes just in time: the foreclosure moratorium will lift on July 31, 2021. According to the statement, the administration is taking this additional action to prevent unwanted and avoidable foreclosures. This action in combination with the additional homeowner protections introduced by the CFPB in June, 2021 (and effective August 31, 2021) will go a long way toward helping homeowners impacted by COVID-19.
It’s still unclear when homeowners will be able to take advantage of the payment reduction initiative. Each mortgage agency will work with servicers to offer options based on the homeowner’s loan type.
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Proposed payment reduction plans
The newly proposed plans vary by loan type, but they all seek to reduce the homeowner’s principal and interest payment by 20-25%. Note that other housing costs like taxes and hazard insurance would not be included in this reduction. Still, this would be a hefty discount for struggling homeowners.
For those who can resume pre-forbearance payments, HUD will provide a zero-interest second loan (subordinate lien). It does not need to be repaid until the home is sold or refinanced. Homeowners who can’t resume their former payments will be offered the COVID-19 Recovery Modification. This would seek to reduce the principal and interest payment by 25% by extending the loan to 30 years starting from the modification date, and lowering the rate to market rates.
VA may purchase the balance that the veteran has accrued after going into forbearance, plus additional loan principal. The VA would then create a second mortgage (subordinate lien) at 0% interest. The VA would need to be repaid, but repayment terms are unclear. This option is called the COVID-19 Refund Modification. Additionally, servicers will be able to modify the original loan term to up to 40 years, significantly lowering monthly payments.
The USDA COVID-19 Special Relief Measure would seek to reduce principal and interest payments by 20%. Servicers would first offer a rate reduction. If this is not enough to achieve a 20% reduction, a term extension and mortgage recovery advance could be offered. A mortgage recovery advance is a one-time payment to bring the loan current, which does not have to be repaid until the home is sold or refinanced.
Fannie Mae and Freddie Mac: Conforming loans will continue offering existing options, such as deferring up to 18 months of payments into a zero-interest loan, payable when the home is sold or refinanced. Additionally, a Flex Modification is available which wraps in all past-due amounts and extends the mortgage term to 40 years.
Homeowners with loans not backed by a federal agency could be eligible for help as well. Assistance through the Homeowner Assistance Fund (HAF), a nearly $10 billion fund, can be used toward mortgage payments, homeowners insurance, utility payments, and other costs.
This group of plans is great news for homeowners and come with little downside. For struggling homeowners, this is welcome news.
A 25% reduction in principal and interest payments could just be enough to keep people in their homes and far away from foreclosure.
Fairway is not affiliated with any government agencies. These materials are not from VA, HUD or FHA, and were not approved by VA, HUD or FHA, or any other government agency.
Some references sourced within this article have not been prepared by Fairway and are distributed for educational purposes only. The information is not guaranteed to be accurate and may not entirely represent the opinions of Fairway.