The Department of Veterans Affairs (VA) holds 25% of the risk of loss associated with borrower default on VA-guaranteed mortgages. Therefore, VA has an economic interest in directing mortgage servicers to engage in risk management techniques that will reduce the number of defaults on VA-guaranteed loans that transition to disposition (i.e., foreclosure, short sale, or deed-in-lieu of foreclosure) and cause losses to the agency.
These risk management techniques, referred to as home retention programs, serve a specific purpose: to enable delinquent borrowers to reperform. Through reperformance, the mortgage guarantor avoids the high cost of dispositions and thus mitigates losses it would otherwise incur. For VA, the potential benefit of cost-effective home retention programs is significant, as we estimate that the average disposition today would cost VA $73,750. For context, my research finds that home retention programs generate substantial savings relative to disposition. For example, for each home retention action completed, Fannie Mae and Freddie Mac (the GSEs) save $19,000 relative to disposition, and the Federal Housing Administration (FHA) saves $25,000 relative to disposition.
The VA Home Loan Program Reform Act (HLPRA), which was signed into law on July 30, 2025, requires VA to implement a Partial Claim (PC) program. In addition, the statute requires VA to implement a mandatory loss mitigation waterfall that prescribes the sequence of assistance measures that mortgage servicers must follow to resolve delinquent loans.
With the purpose of home retention programs in mind, we suggest VA consider three recommendations for the VA loss mitigation program, which, when taken together, will allow VA to structure home retention solutions that generate loan reperformance and thereby avoid the high cost of dispositions. We recommend VA:
- Adjust the VA loss mitigation program to bring it into alignment with the best practices found in programs for other government-backed mortgages:
- Delegate to mortgage servicers the authority and responsibility to use VA’s loss mitigation waterfall to assist VA borrowers in default with retaining their homes and to reduce claims on the VA guaranty fund.
- Permit forbearance for up to 12 months of total delinquency, to be resolved using the new home retention waterfall.
- Require borrowers to complete a 3-month Trial Payment Plan to demonstrate affordability before any home retention solution becomes permanent and VA absorbs the cost.
- Permit no more than one loan modification every 24 months, with an exception for borrowers impacted by natural disasters.
- Implement a single set of home retention solutions for all borrowers, including those affected by a natural disaster.
- Structure the PC as a servicer advance secured by the first lien, rather than a subordinate lien, which will reduce the cost and risk of administering the PC program compared to the COVID-era VA Partial Claim Program (PCP).
- To sustain the economic viability of the VA home loan program while also helping VA borrowers retain their homes, develop a waterfall with a sequence of steps ordered to reduce dispositions in a cost-effective manner:
- Lump-sum repayment.
- Repayment Plan, with a term of up to 24 months.
- Borrowers who have overcome a temporary hardship and can resume their original monthly payment should be offered a 30-Year Modification if it can provide a payment reduction, otherwise a Standalone PC.
- Borrowers who are facing an ongoing hardship and need a payment reduction to make their mortgage affordable should be offered an Up-to 40-Year Modification that targets a 25% reduction in monthly principal and interest (P&I) payments. If the target P&I payment cannot be reached, the home retention alternative that creates the lowest monthly payment should be offered.
Collectively, our recommendations will allow VA to create a cost-effective loss mitigation program that provides VA borrowers who fall behind on their mortgage with similar assistance measures available to borrowers with other federally backed mortgages. In doing so, the VA program will generate loan reperformance in a cost-effective manner and allow VA to avoid absorbing the high cost of dispositions.