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‘Extend and pretend’
The COVID relief program allows FHA to make payments, called partial claims, (‘partial’ because the payment is not covering the entire debt) on behalf of delinquent borrowers, and add the amount fronted by the government to the back end of the loan, interest free. The FHA payments on behalf of borrowers cannot exceed 30% of a loan’s unpaid principal balance.
“Consider a borrower who misses five $4,000 monthly mortgage payments,” says the WSJ editorial. “The servicer will add the $20,000 in missed payments to the mortgage and reduce monthly payments by $1,000 for three years—adding another $36,000 to their mortgage. So the borrower is $56,000 deeper in debt, though with no additional interest.”
Mortgage expert John Comiskey projects the FHA “made ~2.6 billion dollars in mortgage payments from these stand alone partial claims last year.” Records analyzed by Comiskey indicate some borrowers made no payments for several years, with the FHA stepping in to bring their loans current every three to four months.
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