Two major mortgage industry trade groups are urging the Department of Veterans Affairs (VA) to overhaul its proposed loss mitigation waterfall and grant a 180-day implementation grace period for its new partial claim program.
In separate letters submitted to the VA on Wednesday, the Mortgage Bankers Association (MBA) and the Community Home Lenders of America (CHLA) warned that the current working draft of the program could harm financially vulnerable veterans. Both groups stressed that rushing the rollout without a six-month lead time would cause operational difficulties for mortgage servicers and create unrealistic expectations for borrowers.
The VA is currently maintaining a public “drafting table” to solicit stakeholder feedback on its partial claim program, which is mandated by statutory changes passed by Congress last summer. However, industry advocates argue that the proposed guidelines leave veterans with substantially worse loss mitigation options compared to borrowers with loans backed by the Federal Housing Administration (FHA) or Fannie Mae and Freddie Mac.
Both groups are concerned with the structure of the VA’s loss mitigation waterfall, referring to a hierarchical process used to evaluate borrowers for options to avoid foreclosure.
The CHLA strongly opposes Step 6 of the proposed waterfall, which would allow a 30-year modification resulting in up to a 15% increase in a borrower’s monthly principal and interest payment. The community lender group argues that putting additional stress on a struggling family’s monthly budget contradicts congressional intent and could increase foreclosures.
“While our concern is less likely to arise in a down-interest-rate environment, in any up-rate or level-rate environment, this policy will only lead to more trouble and harm to veterans, potentially increasing rather than decreasing foreclosures,” the CHLA letter stated.
Similarly, the MBA urged the VA to restructure the waterfall to ensure that a modification resulting in a monthly payment increase is only offered as a last resort, after a veteran has used or been disqualified from receiving a partial claim.
“Payment reduction is the most important driver of modification performance, and the current policy will lead to higher redefault rates,” the MBA maintained.
The MBA also proposed several other technical changes to the waterfall, such as adding a standard forbearance option as the first step of the process and limiting veterans to one permanent home retention option within a 24-month period.
Additionally, the MBA called for improvements to trial payment plans (TPPs). The association requested that the VA require an escrow analysis before a TPP is offered to ensure taxes and insurance are accurately reflected.
The MBA also argued that veterans should not be disqualified from the new partial claim program simply because they previously received a pandemic-era partial claim or COVID-19 refund modification, noting that FHA and Fannie and Freddie borrowers do not face similar restrictions.
