Recently, veterans, active-duty service members, and surviving spouses have had fewer options to avoid foreclosure than borrowers in other government mortgage–backed programs. That’s because the prior US Department of Veterans Affairs (VA) loss mitigation tool, a partial claim program, sunset almost two years ago, and the VA's Veterans Affairs Servicing Purchase (VASP) program, a last-resort foreclosure prevention program, was terminated.

That situation is set to change. On July 30, the bipartisan VA Home Loan Program Reform Act (H.R. 1815) became law. The new law allows the VA to offer delinquent borrowers foreclosure-prevention options that are more comparable with those offered by the government-sponsored enterprises (GSEs) and the Federal Housing Administration (FHA). This comes at a time when nearly 90,000 VA loans are seriously past due, 33,000 of which are already in foreclosure.

Although Congress has taken this important first step, the program’s ultimate success hinges on its implementation. We offer recommendations to improve the program’s rollout and cost-effectiveness, as well as additional legislative fixes that would increase its impact and effectiveness.

How the new partial claim law does—and doesn’t—help VA borrowers

The FHA, the US Department of Agriculture, and the GSEs allow delinquent borrowers to defer up to 12 months of payments via forbearance, giving them the time and opportunity to more accurately assess their financial situation. . At the end of 12 months—or earlier, if the borrower's financial situation is resolved—servicers can offer a waterfall of long-term solutions:

• Repay the deferred payments as a lump sum.
• Repay the deferred payments over several months by increasing monthly payments.
• Move the deferred payments to the end of the life of the mortgage without increasing payments.
• Implement a mortgage modification, which generally reduces payments.

If none of the above options will allow the borrower to remain in their home, the servicer will move forward with a foreclosure or foreclosure alternative, such as a home sale or short sale.

Before H.R. 1815, the VA did not have the funding to support this same forbearance waterfall and could not subsidize modification. The only option it offered was to capitalize missed payments into the loan amount and reset the interest rate to the current market rate, which would typically result in a higher and less sustainable payment.

The new law allows the VA to use a partial claim—up to 25 percent of the loan amount—to fund forbearance, tacking the missed payment amount onto the end of the mortgage term. This approach offers significant relief for many VA borrowers who have recovered their financial footing. 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. 

How to improve the implementation and impact of the VA’s new partial claim law

We recommend taking the following steps to maximize the program’s utility for VA borrowers and prioritize cost-effectiveness and process.

Recommendations for a strong program rollout:

• Roll out by guidance, not regulation, for delinquent borrowers. The bill allows the VA to implement its requirements via guidance for borrowers who were delinquent before the bill was passed, but the bill requires regulation for borrowers who became delinquent afterward. Regulation is more cumbersome, as it requires the Administrative Procedure Act notice and comment period. To deliver relief quickly to the maximum number of borrowers, consistent with the existing legislation, the VA should use guidance for the already-delinquent group. In developing this guidance, the VA should leverage the “drafting table” process to gather rapid industry input, allowing for easy adjustments before rollout.
• Streamline documentation. The VA should streamline requirements and minimize the filing time to increase loss mitigation program effectiveness.
• Develop clear rules for use. Rules for use should be clear, allowing the servicer to decide whether the borrower is eligible. Requiring preapproval is cumbersome and will reduce program effectiveness.
• Accept borrowers’ self-identified eligibility requirements. The bill limits this program to a one-time use on a “primary residence.” “Primary residence” is used to exclude second homes and vacation properties. But active-duty service members may have more than one primary residence, such as the home they owned before entering military service and the home where they are currently stationed. Additionally, for active-duty members and veterans who own multiple homes, servicers have no reliable way to verify whether a partial claim is being made on the primary residence. The VA should therefore accept borrower self-attestation that the delinquent mortgage is not financing a second home or vacation property as the sole documentation required to comply.
• Define the one-time use requirement. The legislation limits the partial claim to a one-time use per loan, and servicers have no way to establish whether the partial claim has been used in the past on servicing that has been transferred. The VA should define one-time use as a going-forward requirement, so as not to include COVID-19 pandemic partial claims.
• Compensate servicers. Servicers should receive compensation for processing the partial claims. This compensation can cover administrative costs and provide incentives for servicers’ participation and facilitate a more efficient process.

Recommendations to advance cost-effectiveness and process consistency with the FHA

• Allow loan modification first when beneficial. To make the program as cost-effective as possible, and to benefit borrowers, require a loan modification ahead of a partial claim in the loss mitigation waterfall if it lowers the monthly payment. A modification with a payment reduction is preferable because the partial claim will not lower the payment, and once the borrower uses their partial claim, they cannot reuse it. Putting the modification first in these circumstances provides more flexibility, saving the partial claim if the borrower runs into financial stress later. Under the current legislation, the borrower would be unable to use a partial claim followed by a modification, as the partial claim would bring the borrower current, making the borrower ineligible for a modification.
• Implement a trial period. Similarly, require a trial period for a partial claim. If the borrower cannot sustain the old payment during the trial period, the partial claim funds will not be expended. The borrower will then preserve the flexibility to use the partial claim later. The FHA loss mitigation waterfall contains both these features.

Recommendations for Congress to improve the law

Legislation may come before Congress before the end of the year, that may offer opportunities to fix H.R. 1815. Two items in H.R. 1815 could be changed that would make the program more impactful and effective.

• Permit rollout by guidance for all borrowers. Congress should allow the VA to use guidance—not regulation—both for borrowers who were delinquent when the bill passed and for those that subsequently go delinquent. This would deliver relief faster by avoiding lengthy rulemaking.
• Enable combined partial claim and modification. Give the VA the flexibility to pair a partial claim with a loan modification when it benefits the borrower. Allowing any unused partial claim balance to reduce principal would align VA options more closely with FHA and GSE programs.

These two fixes would make the loss mitigation options available to VA borrowers comparable with those in GSE and FHA programs, a minimum that those who serve our country deserve.