The Urban Institute, others within HUD, and other agencies have proposed using the Partial Claim Program to reinstate the loan via payments made from the Partial Claim. Payments are made to bridge a shortfall between what is considered ‘affordable’ (a definition that will need to be determined) and existing contractual payments. This proposed program would side-step the requirement to buy the loan out of the MBS pool, and therefore skip the requirement to use current market rates.
Given the rapid increase in interest rates, a loan modification may increase the borrower’s payment even after deferring 30% of the principal in a partial claim or other options. In response, industry participants have been circulating three potential scenarios and solutions.
HUD could present a solution where the partial claim is used as a ‘HELOC draw’ until the cap is reached or the loan term ends. If the cap is reached, HUD may allow the loan to resume its full contractual payment amount.
HUD could present a solution where the full, partial claim is utilized to reduce the borrower payments. The partial claim would be carried in a suspense account in the loan account and drawn upon as payments are made.
HUD could present a solution where a portion, or the full amount, of the partial claim, is used to reduce payments over the remaining course of the loan.
As a technical response to the potential HUD loss mitigation strategy, Brace would be able to provide a new modification waterfall that is able to defer part of a payment into partial claims up to the point of reaching the cap in the form of a trial payment plan.
Implementation details for Scenarios 1, 2, and 3 follow the same pattern and logic—i.e., a partial claim is utilized to reduce contractual payments.
This trial payment plan schedule would be available with the rest of the terms transmittal and would be able to denote which portion of the payment is deferred to partial claims. The standard communication documents and web pages provided by the Brace borrower app would also be updated to handle these cases. A trial payment plan, where the payment amount changes midway in the life of a loan due to reaching the partial claims cap, is also a possiblity.
In Brace’s post-waterfall payment tracking, the engine would be made aware of non-uniform payments and be able to communicate how much is owed at each step in the payment schedule.
This would require a partial claim aware trial payment plan calculator, which would be added as a new product feature. Brace would need to know the computation that HUD considers to be reasonable; in theory, this is:
Represented Iteratively: Assuming 40% is the HUD target reduction percentage
Payment 1: 500 – min(500 * .4, 30_000 – 29_775) = $300 ( 500 – min(200, 225))
Payment 2: 500 – min(500 * .4, 30_000 – 29_975) = $475 (500 – min(200, 25) )
Payment 3: 500 – min(500 * .4, 30_000 – 30_000) = $500 (500 – 0)
TPPs are followed strictly in both the borrower app communication and the servicer app post-waterfall workflow tracking.
Data delivery: Terms would be transmitted to the servicer so they can be aware of how much we are deferring into partial claims on each TPP payment. If Brace is transmitting terms, then a JSON would be used.
Any documents generated from this workout would likely come from a document provider integration.
