The Federal Housing Administration has proposed an alternative program for bringing past-due borrowers current, as payment stress continues to build across FHA portfolios.

A draft mortgagee letter published Monday details the Reinstatement Advance Payment (RAP) method, which would eliminate the registration of subordinate liens on new FHA partial claims, loan modifications and payment supplements for servicers who opt in.

The proposed change, which could potentially enable the Department of Housing and Urban Development (HUD) to recover more equity from FHA-insured borrowers in foreclosure, comes as the housing agency has seen its losses on real estate owned (REO) dispositions surge over the past year.

According to single-family FHA loan performance data published in June, HUD posted an average dollar loss of just over $108,000 on 407 dispositions in April, the latest month for which data is available, compared to an average loss of about $70,000 on 348 dispositions a year prior.

As a loss component of defaulted loan balances, loss on collateral — measured as the amount received by the agency from an REO sale subtracted from unpaid principal balance — has risen to 16.6% of defaulted loan balance as of April.

Servicing experts who discussed the proposal with Scotsman Guide described the alternative — in which servicers can voluntarily participate — as better aligning the FHA’s partial claims process with Fannie Mae’s and Freddie Mac’s processes. Servicers who participate will not need to prepare, execute and record liens for every new partial claim.

“This seems to be very consistent with streamlining the servicing process, and that is a good thing,” said Seth Sprague, director of mortgage banking services at Richey May, a tax audit and advisory firm.

“I do worry a little bit that the further we get away from the creation of the ‘silent seconds,’ the less the borrower will remember that that balance is due,” he added.

Under the RAP proposal, FHA servicers would advance funds needed to reinstate a borrower, which would be added as a non-interest-bearing balance associated with the existing FHA-insured first mortgage, rather than documented as a separate subordinate mortgage and subordinate lien.

“The RAP will reduce the burden on mortgagees in obtaining and recording the notes and subordinate mortgages and align with standard industry practice,” the proposal states, underscoring operational cost savings for FHA servicers.

The FHA said borrower experiences in receiving payment assistance under RAP agreements would be unchanged from the current partial claims process, with the advance still a zero-interest loan typically due at maturity, sale, refinance, mortgage payoff or termination of the FHA insurance policy.

“The RAP will also facilitate the sale, refinance, assumption, and transfer processes as there will no longer be a subordinate lien to resolve,” the proposal adds, eliminating challenges associated with nonjudicial foreclosures of FHA-backed first mortgages.

However, the shift underscores HUD’s recent accumulation of a large inventory of subordinate liens as distressed FHA borrowers — and many on a repeat basis — stacked partial claims against FHA first liens through emergency loss mitigation programs that remained in effect until last October.

“It looks like they are trying to solve some significant issues that have come up with the current program,” said Donna Schmidt, president and CEO of DLS Servicing. She estimates about half of FHA loans had at least one previous partial claim as of October.

Foreclosure activity has climbed rapidly in 2026 after it ground to a halt during and in the years following the COVID-19 pandemic. FHA borrowers represented 55% of all seriously delinquent home loans as of May, an all-time high, according to ICE Mortgage Technology.

By eliminating the subordinate lien requirement, Schmidt explained, HUD has a stronger likelihood of recouping partial claim advances that, as subordinate liens, would typically be wiped out during foreclosure actions. HUD could better recapture advances and unpaid principal balance by doing away with the subordinate lien through RAP, she said.

“FHA is basically saying that it doesn’t need or want any more subordinate liens on its portfolio,” added Schmidt.

Included in the FHA proposal is the RAP Terms of Repayment (RAPTOR) Plan for borrowers unable to repay the entire RAP balance through a lump sum when their first-lien mortgage matures. Under the program terms, servicers can offer repayment terms of up to 18 months for RAP balances up to $5,000; up to 36 months for balances between $5,000 and $15,000; and up to 48 months for balances over $15,000.

With the pilot program proposed to run for five years, FHA floated incentive fees paid to participating servicers of $500 for partial claim RAPs and $1,750 for payment supplement RAPs, including reimbursement of up to $250 for title-related costs.

Under these proposals, servicers who opt into the program are solely responsible for tracking all repayments of partial claim funds and returning those funds to HUD, alongside scheduled interest, principal and FHA insurance payments.