Many homeowners have received a forbearance on their VA mortgage payments during the COVID-19 pandemic, but the mortgage payments were deferred and not forgiven. See NCLC’s Mortgage Servicing and Loan Modifications § 12.3.7.3. Homeowners who have recovered from COVID-19 hardships will soon be exiting the forbearance program, and then these homeowners must address both the past deferred payments and the new monthly mortgage payments. This takes on added significance since the moratorium on foreclosure of VA mortgages is scheduled to expire on June 30, 2021, if the expiration date is not extended again.
The VA has just issued a final rule setting out a “partial claim” program that, effective July 27, 2021, allows homeowners to resume their new regular monthly mortgage payments without first having to pay the past mortgage payments that were forborne under the COVID-19 program. See 86 Fed. Reg. 28,692 (May 28, 2021). This final rule will provide homeowners significantly better protection than the VA had initially set out last December in its first proposal for a final rule. See 85 Fed. Reg. 79,142 (Dec. 9, 2020).
The final rule brings the VA’s partial claim program into alignment with other federally related programs dealing with those exiting COVID-19 related mortgage forbearances. For a description of these other forbearance exit programs see NCLC’s Mortgage Servicing and Loan Modifications §§ 12.3.4.3.2 (Fannie Mae), 12.3.5.2.2 (Freddie Mac), 12.3.6.4 (FHA), 12.3.8.4 (USDA).
Of special note, links to NCLC’s Mortgage Servicing and Loan Modifications § 12.3 for a limited time are all open to the public.
This article also lists homeowner options when a homeowner with a VA mortgage coming out of forbearance cannot afford the new, regular monthly charges. These VA options are examined in more detail at NCLC’s Mortgage Servicing and Loan Modifications § 9.2.2.
The VA’s new program allows servicers to offer a “partial claim” option to VA-guaranteed borrowers to bring their loans current. The partial claim option is modeled after a long-standing FHA program. See NCLC’s Mortgage Servicing and Loan Modifications Chapter 8. The partial claim involves the mortgage servicer making a claim on the VA for a portion of the outstanding mortgage balance—in this case the portion equal to the forborne payments.
The borrower then owes the partial claim amount to the VA at 0% interest and only due at the end of the mortgage loan. There are no monthly payments required from the borrower to the VA for repayment of the partial claim. After the VA pays the partial claim, borrowers restart their pre-hardship mortgage payments to the mortgage servicer with the same monthly payment as before the forbearance.
The partial claim program is available for VA-guaranteed borrowers who are exiting COVID-19 forbearance plans and who were current or less than thirty days past due as of March 1, 2020. Borrowers must indicate to the mortgage servicer that they can resume their former monthly payment. The partial claim loan cannot exceed 30% of the loan’s unpaid principal balance.
The new VA rule going into effect July 27 is a distinct improvement over the VA’s original December 9, 2020, proposal. In response to comments from a coalition of consumer advocates led by the National Consumer Law Center (NCLC) and also from the mortgage industry, the VA eliminated several problematic features from their original proposal.
The VA’s original proposal required borrowers to repay the partial claim within 10 years but did not require any payments during the first five years of the term. As a result, borrowers still living in their homes would have faced a significant payment shock after the first five years of the partial claim loan. In addition, the VA proposed charging borrowers 1% interest and limiting the size of the partial claim to 15% of the borrower’s unpaid balance. It also required a full financial documentation for borrowers wanting to access the partial claim, which would impose a significant barrier to borrowers actually accessing the program.
The VA eliminated all of these problematic loan features and instead provided a program in line with the FHA’s partial claim program. See NCLC’s Mortgage Servicing and Loan Modifications § 12.3.6.4. By making these changes, the VA increased the amount of assistance borrowers can receive and eliminated unnecessary barriers to accessing the programs. VA-guaranteed borrowers no longer face payment shock and additional interest payments.
The new final rule delays any obligation to repay the past forborne mortgage payments, allowing homeowners to resume their normal monthly mortgage payment. The VA’s new partial claim program does not help borrowers who now cannot afford to pay their new regular mortgage payments. These borrowers should consider the VA’s pre-existing loan modification programs including: