188.8.131.52.4 COVID-19 Recovery Modification
If the borrower indicates that a payment pursuant to the COVID-19 Standalone Partial Claim is not affordable, the servicer should then evaluate the borrower for the COVID-19 Recovery Modification (“Recovery Modification”).371 The Recovery Modification combines a loan modification and a partial claim in order to target a 25% reduction in the borrower’s monthly principal and interest payment from its pre-hardship level.372 The targeted payment reduction makes the Recovery Modification similar to the ALM; however, the Recovery Modification involves a partial claim to achieve the payment reduction.
HUD provides an order of steps that the servicer applies until the targeted reduction is reached. It is important to note that the statutory and 25% COVID-19 partial claim limitations—described above regarding the COVID-19 Standalone Partial Claim—also apply to the Recovery Modification.373
To determine the terms of the Recovery Modification, the servicer first places the borrower’s arrears in a partial claim, assuming the borrower has partial claim availability.374 It is unclear from Mortgagee Letter 2021-18 whether the servicer should place the borrower’s full arrears into a partial claim if that would involve a payment reduction of more than 25%. Alternatively, the servicer could only place the amount of arrears in the partial claim needed to hit a 25% payment reduction. It appears that HUD believes the full arrearages should be placed in a partial claim in this step according to its training materials.375
Next, the servicer modifies the interest rate and extends the term of the mortgage to 360 months.376 As with the ALM, the interest rate should not exceed Freddie Mac Primary Mortgage Market Survey (PMMS) rate as of the date of the offer rounded to the nearest 0.125. If, after the servicer performs the initial partial claim and modification steps, the borrower achieves a 25% reduction in principal and interest payment, the servicer should offer the COVID-19 Recovery Modification. If the target is not achieved, the servicer moves to the next step.
Finally, the servicer provides additional partial claim to achieve the targeted 25% reduction.377 In this instance, the partial claim will reduce the interest-bearing principal of the loan, and the servicer should only provide enough partial claim to reach the monthly payment target. Providing additional partial claim is subject to the limitations discussed above. If the 25% reduction is reached, the borrower is offered a modification.
Even if 25% reduction is not achievable because there is insufficient partial claim availability or for some other reason, the servicer should still offer “the lowest monthly P&I payment achieved under the COVID-19 Recovery Modification.”378
Of course, some borrowers may need more than a 25% reduction of principal and interest to afford their loan. According to a HUD FAQ, those borrowers should be offered additional partial claim, subject to availability. “Mortgagees must target a 25 percent Principal and Interest (P&I) reduction but may exceed 25 percent P&I reduction if the Borrower cannot afford the payment and still has partial claim allocation available.”379
371 HUD, Mortgagee Letter 2021-18, at 14
373 See § 184.108.40.206.3a, supra.
374 Id. at 16. Determining the partial claim availability is listed as Step 1 in the Mortgagee Letter, and determining the size of the arrears is Step 2. Placing the arrears into a partial claim is listed as Step 3.
375 HUD Webinar, COVID-19 Recovery Loss Mitigation Options Mortgagee Letter 2021-18 (Sept. 10, 2021), available at https://www.hud.gov.
376 HUD, Mortgagee Letter 2021-18, at 16.
377 HUD, Mortgagee Letter 2021-18, at 16.
378 Id. at 16.
379 HUD, FAQ Topic Number KA-05834, available at https://hudgov.dynamics365portals.us.