VA partial claim program still shrouded in uncertainty

President Donald Trump signed the VA Home Loan Program Reform Act in late July, adding a partial claim option to the VA’s loss-mitigation waterfall. The move brings the VA’s approach closer to that of the Federal Housing Administration (FHA) and the government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac.

It replaces both a partial claim program that sunset two years ago and the Biden administration’s Veterans Affairs Servicing Purchase (VASP) program, which stopped accepting new applications in May.

“When they suspended VASP, there were 73,000 VA borrowers that were 30 or more days delinquent; 40,000 of them were more than 90 days delinquent, which means they’re heading to foreclosure,” said Donna Schmidt, director of DLS Servicing and co-founder of Waterfall Calc. “VA foreclosures have gone up 498% since last year.” 

“It’s definitely a risk,” said Matt Tully, Sagent’s chief compliance officer, when asked whether the program could arrive too late. “Obviously, you have to be thoughtful about how you set up a program, but the VA did have a partial claim in the past. It’s not like unfamiliar territory for them, or you couldn’t model it off FHA or even the USDA.” 

Servicers and vendors need time after the rules are finalized to implement the program. Schmidt noted her system would need 60 days to adapt. Tully added that while technology isn’t a barrier, servicers will need to update policies, procedures and call center training — a process that also takes months.

According to Tully, the industry’s top concern is to avoid unnecessary red tape — to accomplish the task through informal guidance versus formal rulemaking.

“Part of what the industry has been asking for is, ‘Don’t be overly rigid around the setup,’” he added. 

How does it work?

Currently, the FHA, the GSEs and the U.S. Department of Agriculture (USDA) offer borrowers up to 12 months of forbearance, followed by a waterfall of options. These include repaying missed payments in a lump sum, spreading them out over several months, deferring them to the end of the loan term or modifying the mortgage to reduce the monthly payments.

VA borrowers, however, didn’t have these same options. Instead, missed payments were added to the loan balance, and the mortgage was reset at the prevailing market rate — often leaving borrowers with higher monthly payments.

The new VA partial claim program changes that. It allows borrowers to defer up to 25% of their loan balance (30% if they already used a COVID-era partial claim) to the end of the mortgage term. The five-year partial claim applies to primary residences in default or at imminent risk of default.

“This approach offers significant relief for many VA borrowers who have recovered their financial footing,” a team of experts from the Urban Institute wrote in a white paper released in late August.

“But the law, as currently structured, does not allow the balance of the partial claim to either reduce the principal amount or subsidize the payments over time to make a modification more affordable — providing VA borrowers less flexible repayment options than GSE and FHA programs.” 

The Urban Institute recommended, among other things, that the VA roll out the program via guidance with streamlined documentation, no preapprovals, servicer compensation to cover administrative costs and a clarified definition of “one-time use.”

While help is on the way…

Harold Lewis, president and chief operating officer at BSI Financial Services — where VA loans comprise 25% to 30% of the $50 billion servicing portfolio — said that other relief options exist for struggling veterans, such as 30- or 40-year amortization modifications.

These only become attractive to borrowers in a low-rate environment. But there is a caveat, he said.

“All of the rules have not been released. But generally, if you’ve had a modification or prior partial claim, you are not allowed for a new opportunity. Now, with the new partial claim, if you have had a partial claim when they were instituted earlier back in 2022, you still could qualify for additional help,” Lewis said.  

This creates challenges for servicers, according to Schmidt, since there’s no centralized database to show whether a borrower already received a partial claim from another servicer. She hopes that VA Secretary Doug Collins, who has broad authority to set program rules, will allow some principal reduction as part of the new structure.

Still, she added, “unfortunately, the VA is so closed-lipped that we don’t know what they’re going to do.” 

The predecessor program, VASP, allowed the VA to buy loans from servicers and reissue them at a 2.5% rate. While the VA paid for these loans, servicers often struggled to transfer them, leaving the assets on their books without compensation.

“It was very helpful to borrowers, but it was a very poorly designed program — insanely expensive,” Schmidt said.

At BSI, executives are preparing to implement the partial claim program “post-haste,” Lewis said, despite uncertainties about the VA’s rule clarifications and potential delays due to variations among VA’s eight regional loan centers. But they emphasized the importance of liquidity and timely funding to servicers. 

Christopher George, founder of California-based lender CMG Financial, said the new partial claim program is well-timed.

“If, a year from now, we see inflation getting out of control and the Fed steps in — and maybe we see a slowdown or recession — this is exactly what veterans will need,” George said. “I think we really did a good job with this as it isn’t a reactionary effort. It will already be in place when a recession hits and we need it most.”

Brooklee Han contributed reporting to this story.