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MortgagePoint » Your Trusted Source for Mortgage Banking and Servicing News 42 December 2023 F E A T U R E F rom policies implemented following the 2008 financial crisis to mortgage relief programs put in place during the COVID-19 pandemic, the mortgage industry has seen many innovations in how distressed mort- gages are resolved. As distressed home- owners today are facing new challenges associated with a high-rate, high-value real estate market, the Supplemental Partial Claim is one tool that may help mortgage professionals and homeowners manage through these difficult times. As a standalone tool that has been around for many years, it is functional in certain circumstances and can address a number of defaulted loans. While it has some limitations, it can serve as a pathway to new workout solutions. Mortgage professionals and homeowners can benefit from a deeper understanding of how Supplemental Partial Claims work, the benefits and drawbacks they present in today's mortgage landscape, and other considerations. How Supplemental Partial Claims Work T he basic premise for Supplemental Partial Claims is that 30% of the unpaid principal balance (UPB) of the mortgage will become the source of funds to offset the arrears and create a balloon balance due at the end of the loan. Any funds left over after the arrears will be used to calculate the amount and period of time—up to 60 months—that the prin- cipal portion of the monthly payment will be reduced at a 25% rate. At a minimum, there will be a 5% reduction in payment. A series of calculations is conducted to determine if the partial claim principal reduction lasts for up to 60 months (if less than 36 months, there is a 5% payment re- duction) and to determine "excess" equity after the arrears to be used to calculate a reduced principal payment. The goal is to reduce the principal portion by up to 25% maximum monthly principal reduction (Max MoPR) for up to 60 months, based on the difference between the arrears and the MaxMoPR. The Federal Housing Finance Agency (FHFA) and the Department of Housing and Urban Development (HUD) have pro- vided a worksheet that can be automated either in Excel or in an application to run loan scenarios to evaluate loans for eligibil- ity. Based on most calculations, it appears that the Supplemental Partial Claim will create lower payments in response to a number of defaulted loans and provide some hope in this high-rate environment. Potential Drawbacks W hile there are many advantages to Supplemental Partial Claims, there are drawbacks to consider as well. Not all loans will qualify for the payment reduction, even at 5%. Furthermore, vari- able rate loans and prior bankrupt loans that did not reaffirm are ineligible. More mature loans will have a lower maximum partial claim due to the pay-down of the principal balance. Additionally, there are multiple calculation points for potential errors. What is clear is that the greater the UPB versus the arrears, the greater and longer the savings. The Supplemental Partial Claim appears to only work with agency and government loans, as it's unclear whether the same interest rate can be maintained with nonagency or nongovernment loans. Furthermore, it's not widely understood by the general population and is not offered nationally. FHFA SUPPLEMENTAL PARTIAL CLAIM: THE NEXT ITERATION Taking a deep dive into Supplemental Partial Claims, the benefits and drawbacks they present in today's mortgage landscape, and other considerations. B y J O S E P H S M I T H J O S E P H S M I T H is Managing Director of Stretto. Early in his career, Joseph Smith co-founded and served as CEO for Default Mitigation Management, LLC (DMM) and was instrumental in positioning the company for acquisition by Stretto. Alongside his DMM role, Smith was SVP and then EVP of Consumer Financial Services and Mortgage Subserving at Provident Bank for five years. At Stretto, Smith leads a multidisciplinary team of internal industry experts and technologists to enhance the DMM Portal to meet stakeholders' evolving needs, including the diverse challenges facing both attorneys and loan servicers. Gleaning insight from decades of experience collaborating with bankruptcy attorneys and their clients, Smith provides valuable guidance to Stretto's technology team related to crucial software enhancements to maintain up-to-date court-required forms and ensure borrowers meet regulatory compliance.