FHA proposes partial claim model that drops subordinate liens

The Federal Housing Administration (FHA) is proposing a new structure, called Reinstatement Advance Payment (RAP), that would change how servicers document and service partial claims and payment supplements. 

Under the draft, attributed to Joseph M. Gormley, who is performing the delegable duties of the assistant secretary for housing–federal housing commissioner, the FHA would test a model that eliminates the traditional zero-interest subordinate lien used today for partial claims.

Instead, servicers would advance funds on the borrower’s behalf and add a non-interest-bearing balance to the existing FHA-insured first mortgage. The borrower would sign a RAP repayment agreement rather than a separate promissory note and subordinate mortgage.

“The RAP will reduce the burden on mortgagees in obtaining and recording the notes and subordinate mortgages and align with standard industry practice,” FHA states in a Mortgagee Letter.

According to the FHA, the structure would also facilitate the “sale, refinance, assumption and transfer processes” as there will no longer be a subordinate lien to resolve, removing challenges associated with nonjudicial foreclosures.

From the borrower’s perspective, the loss-mitigation experience is designed to look the same, the letter states. The advance remains a zero-interest obligation that is generally due only at maturity, sale, refinance, payoff, or termination of FHA insurance. Borrowers could make partial or full payments toward the RAP balance at any time without penalty.

The draft also introduces a RAPTOR Plan (RAP Terms of Repayment) for borrowers who cannot repay the entire balance in a lump sum when the mortgage matures. Under the proposal, servicers could offer repayment terms up to 18 months for RAP balances up to $5,000; up to 36 months for balances between $5,000 and $15,000; and up to 48 months for balances over $15,000

For servicers, the most significant operational shift is the removal of subordinate-lien mechanics. The RAP structure eliminates the need to prepare, execute, record and deliver separate partial claim notes and mortgages in HUD’s name, bringing FHA workouts closer to how many conventional investors handle similar advances.

The draft states that all mortgagees would be eligible to participate. Participation would be voluntary and servicers would not need to use RAP on every partial claim.

The demonstration is expected to run for five years. FHA is proposing incentive fees of $500 for a partial claim RAP and $1,750 for a payment supplement RAP, along with reimbursement of up to $250 for required title-related expenses.

This article was written by Flávia Furlan Nunes and generated with the assistance of HousingWire Automation, then reviewed by a HousingWire editor before publication.