FHA Proposes Reinstatement Advance Payment for Partial Claims

The Federal Housing Administration (FHA) is proposing a new structure called Reinstatement Advance Payment (RAP) that would alter how servicers document and manage partial claims and payment supplements. This draft proposal, attributed to Joseph M. Gormley, who is performing the delegable duties of the assistant secretary for housing–federal housing commissioner, outlines a model that would eliminate the traditional zero-interest subordinate lien currently used for partial claims. Instead, servicers would advance funds on behalf of the borrower and add a non-interest-bearing balance to the existing FHA-insured first mortgage. Borrowers would sign a RAP repayment agreement instead of a separate promissory note and subordinate mortgage.

According to an FHA Mortgagee Letter, the RAP is intended to reduce the burden on mortgagees in obtaining and recording notes and subordinate mortgages, aligning with standard industry practices. The FHA also states that this structure would streamline the sale, refinance, assumption, and transfer processes by removing the need to resolve subordinate liens, thereby mitigating challenges associated with nonjudicial foreclosures. For borrowers, the loss-mitigation experience is designed to remain consistent, with the advance still functioning as a zero-interest obligation typically due at maturity, sale, refinance, payoff, or termination of FHA insurance. Borrowers would retain the option to make partial or full payments toward the RAP balance at any time without penalty.

The draft also introduces a RAPTOR Plan (RAP Terms of Repayment) to assist borrowers who cannot repay the entire RAP balance in a lump sum upon mortgage maturity. Under this plan, servicers could offer repayment terms ranging from 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 exceeding $15,000. The most substantial operational change for servicers would be the removal of subordinate-lien mechanics, replaced by the RAP system.