Key facts
- The FHA is proposing a new Reinstatement Advance Payment (RAP) model for partial claims.
- The RAP model will eliminate the need for zero-interest subordinate liens.
- Borrowers will sign a repayment agreement instead of a separate promissory note and subordinate mortgage.
- This change aims to simplify processes for servicers and facilitate property transactions.
- A RAPTOR Plan will offer repayment terms for borrowers unable to pay the full balance at maturity.
- The demonstration program is expected to last five years and includes incentive fees for servicers.
The Federal Housing Administration (FHA) is introducing a proposed new structure, known as the Reinstatement Advance Payment (RAP), designed to streamline the servicing of partial claims and payment supplements. This initiative, detailed in a draft attributed to Joseph M. Gormley, aims to eliminate the current practice of using zero-interest subordinate liens for partial claims.
Under the proposed RAP model, mortgage servicers would advance funds on behalf of borrowers. These advanced amounts would be added as a non-interest-bearing balance to the existing FHA-insured first mortgage. Borrowers would then sign a RAP repayment agreement, replacing the need for a separate promissory note and subordinate mortgage. The FHA stated in a Mortgagee Letter that this change is intended to reduce the burden on mortgagees in obtaining and recording notes and subordinate mortgages, aligning FHA processes more closely with standard industry practices.
Furthermore, the FHA anticipates that the RAP structure will simplify property sale, refinance, assumption, and transfer processes by removing the need to resolve subordinate liens. This is also expected to alleviate challenges associated with nonjudicial foreclosures. For borrowers, the loss-mitigation experience is designed to remain largely the same, with the advance still being a zero-interest obligation typically due at mortgage maturity, sale, refinance, payoff, or termination of FHA insurance. Borrowers would retain the flexibility to make partial or full payments toward the RAP balance at any time without penalty.
The draft also includes a RAPTOR Plan (RAP Terms of Repayment) to assist borrowers who cannot repay the entire RAP balance in a lump sum upon mortgage maturity. This plan allows servicers to offer repayment terms ranging from up to 18 months for balances up to $5,000, up to 36 months for balances between $5,000 and $15,000, and up to 48 months for balances exceeding $15,000.
For servicers, the most significant operational change is the elimination of subordinate-lien mechanics, removing the need to prepare, execute, record, and deliver separate partial claim notes and mortgages in HUD’s name. This brings FHA workouts closer to conventional investor practices. All mortgagees are expected to be eligible to participate in the program, which will be voluntary, allowing servicers to choose when to apply the RAP structure. The demonstration period is slated to last for five years, with proposed incentive fees of $500 for a partial claim RAP and $1,750 for a payment supplement RAP, along with reimbursement for title-related expenses.