VA finalizes new distressed borrower assistance

The Department of Veterans Affairs has unveiled new procedures for distressed borrowers with mortgages it partially guarantees, including an option that may help many who got loans at lower rates than are currently available in the market.

The VA will be ready to accept the legislatively-mandated partial claim that addresses the interest rate concern on June 15. Servicing systems must be set up to accommodate this and a new "waterfall" for distressed borrowers on Nov. 28. 

Mortgage Bankers Association President and CEO Bob Broeksmit released a statement welcoming the new option.

"We are pleased to see that veteran homeowners will have access to a key loss mitigation option available to other borrowers with government-backed mortgages that can allow veterans to remain in their homes without increasing their monthly payments," he said.

Other industry professionals said they were still reviewing the details of the new partial claim and waterfall at the time of this writing but generally found the VA addressed concerns in an earlier draft.

"There may be some hurdles in it, but it's way better than it was," said Donna Schmidt, president and CEO of DLS Servicing.

A new last resort

The new partial claim appears to be the last step away from pandemic leniencies, following the discontinuation of the VA Servicing Purchase program last year. During the pandemic, the VA temporarily offered a more expansive version of the partial claim that the department found was not financially viable on a long-term basis.

VA's current partial claim is a new one-time last resort option, available only in circumstances where a borrower hasn't previously gotten any version of it and after other options have been exhausted, said Schmidt.

The new partial claim may help VA borrowers with hardships obtain more affordable current rates by moving certain allowable portions of their obligations into a subordinate lien. VA reimburses mortgage firms for the amounts and the borrower must satisfy the obligation upon first-lien payoff, property sale or transfer, if not sooner.

"What we've been hearing is there have been some foreclosures on VA loans because the borrowers have no lower payment option. If they have a low interest rate, the only option has been to go up to 6% or 7%, so their payments are going up when they're coming off of default. This will at least keep their payments the same if they're recovering," Schmidt said. 

The finalization of the partial claim comes a week after Rep. Chris Pappas, D-N.H., and 27 other legislators wrote to VA Secretary Doug Collins, calling for a new foreclosure moratorium due to concern about the gap between VASP ending and availability of the new partial claim. 

Trial payment plans

While the VA's new waterfall for distressed borrowers is distinct in many ways, it does have some limited parallels with one the Federal Housing Administration put into place last October as an offramp from its pandemic policies.

One is that there is a new need at the VA for three months of trial payments as part of the department's discontinuation of pandemic leniencies. Successful completion will be necessary for the approval of both partial claims and modifications of loan terms aimed at making payments more affordable. No new modification requests can be made for 24 months. 

Unlike the FHA, which offers more flexibility in its attestation requirements, the VA will require written ones that meet certain deadlines when borrowers request partial claims.

How to manage the interplay of various deadlines that the VA and other authorities impose on distressed borrower assistance and related approvals are among the details industry professionals were looking for more information on at deadline, Schmidt said.

In response to an inquiry from this publication, VA directed mortgage professionals to its updated servicer handbook for details. The VA also allows mortgage professionals to register for training the department is providing in the new procedures later this week.