FHA’s proposed partial claim alternative has the right intent, to simplify deferred payments and reduce the burden of recording second liens. However, whether the test actually works depends on the economics and operational reality for servicers.
Donna Schmidt, President and CEO of DLS Servicing, was recently quoted in National Mortgage News on this topic. She stated that the test could solve some problems, but it will be very difficult for small to mid-sized servicers to absorb. The incentives are there, but they may not cover the cost of new systems, new data elements, and the long-term responsibility for tracking and payoff.
For small and mid-sized servicers, the immediate issue is not compensation. It is the risk of maintaining two separate procedural tracks, one for recorded partial claims and another for the unrecorded alternative, during a program that may ultimately be temporary.
The Operational Reality
Other agencies already use deferred payment structures without second liens. Standardizing that approach for FHA makes sense, but just because it makes sense does not make it feasible.
Servicers still have to build new processes and retrain staff. There are also technology changes and new repayment workflows. For larger servicers or those with strong subservicer support, that may be doable. For smaller operations, the cost could easily outweigh the incentive payments.
Removing the second lien does not change the borrower’s obligation. The deferred amount is still owed, and keeping that balance visible on the borrower’s mortgage statement may actually be more valuable because it fully discloses the amount due and helps borrowers understand their true financial position. That’s a real upside. But it only matters if servicers can implement the test without interrupting their operations in the process.
What Servicers Should Ask
Before deciding whether to participate, servicers should be asking:
- Do we have the systems and staff to absorb new data elements and repayment workflows?
- Do the incentives cover our actual cost, or are we subsidizing the test?
- Does our vendor support make this realistic?
- Do we have the ability to track two completely different approaches to managing Partial Claim participation for not just the short term, but also for the life of the loan?
The answer may be different for every servicer, and that’s fine. The test is voluntary for a reason.