Loss-mit changes signal a return to normal in mortgage

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As we foretold, the Trump Administration is moving to roll-back many of the policies of the Biden regime in the world of housing, particularly open-ended forbearance. The result is likely to be more short-sales and foreclosures, and more homes to sell. But President Trump also wants to build more homes.

The Joint Task Force on Federal Land for Housing was created with the goal to increase housing supply and decrease costs. The Housing Center at American Enterprise Institute argues in an open letter that developing Bureau of Land Management acreage could yield three-plus million new homes across western states such as Nevada, Arizona, New Mexico, California, and Oregon.

The effort to increase the supply of new homes is admirable, but one way that the supply of homes is likely to increase in the near-term is rising foreclosures. Last week, HUD released Mortgagee Letter 25-12, “Tightening and Expediting Implementation of the New Permanent Loss Mitigation Options,” for the servicing of FHA Mortgages. 

“Modification failures by delinquent FHA borrowers were 50 to 60% at 90 to 120 days in arrears,” one industry veteran tells NMN. “That’s way too high. HUD has simply gone back to the pre-COVID rules. Will this lead to more foreclosures? Yes, but not a huge spike. Delinquent borrowers will simply sell the house. The net result will be more supply of homes.”

The previous letter on the topic laid out new guidelines for servicing and modifying delinquent FHA mortgages effective February 2, 2026. This new ML moves the effective date up to October 1st of this year. While the partial claim (PC) option is still in place at the FHA, the fact that a borrower may request a PC once every 24 months effectively means that failed modifications are likely to be resolved quickly. 

“For loans originated/modified prior to Sept 30th, you will probably see delinquencies rise and timelines extend slightly as the trial payment period (TPP) requirements are put in place,” writes Scott Buchta of Brean Capital. “For loans modified under the new guidelines, we would expect to see timelines extend a bit further as most likely outcomes will be disposition options such as pre-foreclosure sales, deed-in-lieu and actual foreclosure sales.”

In addition to the changes at the FHA, the U.S. Department of Veterans Affairs (VA) will end the Veterans Affairs Servicing Purchase (VASP) program on May 1, 2025. The VA announced this decision on April 3, 2025, meaning that distressed borrowers in uniform have few options to avoid foreclosure. A number of industry executives think that the changes at FHA and VA should coincide and that the short notice given to men and women in uniform was badly handled.

“VASP sundown, particularly as accelerated as it was, is going to mean significantly more VA [foreclosure] activity this year,” notes John Cominskey, publisher of Reverse Engineering Finance on Substack. “Maybe 50-60k more than would have occurred under VASP this year.”  Cominskey writes excellent analysis of the government loan market. 

Unlike a partial claim in the FHA market, there is no loss mitigation option now for veterans. Many distressed veteran borrowers will lose their homes in coming months as a result of pressure from House Republicans. That’s ugly political optics for the Trump Administration and a glaring example of the incapacity of Congress to address reasonably straightforward needs of people in uniform. 

“Halting the VASP program will increase the number of veterans facing foreclosure unless the VA and Congress implement a permanent partial claim option as soon as possible,” MBA President Bob Broeksmit said last month. 

Industry sources say that more than half of all mortgage payoffs today are outright sales as inflation forces Americans out of home ownership, thus timing of the end of VASP is particularly unfortunate. The VASP cancellation was reportedly driven by pressure from Congress led by Republican representative from Wisconsin, Rep. Derrick Van Orden.

In happier news, Ginnie Mae has a new EVP and COO, Joseph M. Gormley, a veteran industry executive who brings competent leadership after years of chaos under Joe Biden. Gormley joins a strong team at FHA, including Frank Cassidy who was nominated as FHA Commissioner and Matt Jones as Deputy Assistant Secretary for single-family housing. 

Jones was formerly at the Mortgage Bankers Association and played a key role in fashioning the new FHA servicing waterfall. Cassidy has significant experience in multifamily housing, a skillset that is likely to be needed in coming months. The commercial real estate sector has record levels of delinquency and loss severity.  Defaulted bank-owned multifamily loans, for example, are experiencing average loss severities of 100% of the loan amount.