The Federal Housing Administration on Wednesday proposed a plan to get mortgage borrowers who are behind on their payments back on track by temporarily reducing their monthly bills. As part of the plan, borrowers would avoid giving up their ultra-low mortgage rates.

FHA would essentially use its insurance fund to pay part of a homeowner's monthly bill and then schedule the repayment as a second loan after the first one is paid off, officials said. This would apply to those who would not otherwise benefit from a conventional modification, which involves giving up their low interest rate in favor of a higher one.

"We're seeing a lot of people having to do modifications that either don't reduce their payments or in some cases raise their payments," said Julia Gordon, assistant secretary for housing at the U.S. Department of Housing and Urban Development." Over time, this will not have the success rate we would like to see."

Officials are trying to solve a problem that is unique to this economy. The Federal Reserve is raising interest rates and vowing to keep them high to fight inflation, pushing mortgage rates last year to the highest level in more than 20 years. At the same time, the economy is showing signs of strain and more Americans are getting into financial trouble.

Historically, when the U.S. enters a recession and the Federal Reserve cuts interest rates to stimulate the economy, homeowners' woes rise. Struggling borrowers can then take advantage of falling interest rates to reduce their monthly mortgage payments.

For example, during the 2008 financial crisis, borrowers who were delinquent on their loans took advantage of modification programs offered by the federal government or their servicers to get their loans back on track. In doing so, they were offered market rates. Since interest rates were declining, their new rates were typically lower.

The federal loan program currently offers a menu of options for restructuring loans. one option from the FHA is to extend the term of the loan to 40 years to spread out the payments. But it also involves giving up the old interest rate.

The prime rate for a 30-year mortgage is now north of 6 percent, more than double the level during the pandemic. Modifying a mortgage and going with the current rate could mean paying hundreds of dollars more per month.

Gregory Schuknecht of St. John, Florida, took advantage of the pandemic forbearance program to suspend payments on his FHA mortgage. When he went to restart his payments, his mortgage company offered him a modification package with a higher interest rate in May.

The new rate was 6.875 percent, up from 3.875 percent, which would have raised the monthly payment from about $1,350 to about $1,900.

Under the new terms, the mortgage would be paid in full in 2063, well beyond the original maturity date of 2046.

Shuknecht, who receives Social Security benefits and works in delivery, said he is happy to have his mortgage reinstated despite the increased costs." I'll be here delivering Wal-Mart groceries day and night, but it will keep my kids at home," he said.

The new proposal could raise concerns that the government is giving money away to people who can't afford their mortgages. fha officials point out that the government will be repaid at the end of the loan term and that it is less expensive for the government to help borrowers get back on track than it is to foreclose.

Housing experts are concerned that putting borrowers on the hook for higher mortgage payments would put them at risk of falling behind again. A 2017 report by the JPMorgan Chase Institute found that a 10 percent reduction in mortgage payments is associated with a 22 percent reduction in default rates.

The FHA-backed loan program already focuses on first-time homebuyers and tends to serve borrowers with lower incomes and credit scores than mortgages backed by Fannie Mae or Freddie Mac. The program currently has about 320,000 borrowers who are seriously delinquent.

"Now when we say modify, we have to educate borrowers that you may have higher payments," said Marissa Witt, a housing counselor with Jacksonville Area Legal Aid.

In the proposed new program, FHA would help struggling homeowners catch up on late payments and reduce their monthly bills. Monthly principal and interest payments could drop by 25 percent over a period of up to five years, and the FHA's total subsidy could reach 30 percent of the loan balance.

If a homeowner is paying $800 per month in principal and interest, the FHA subsidy might include $200, so the homeowner only has to pay $600. The mortgage company will pay the $200 to the investor who owns the loan and is then reimbursed by the FHA.

The homeowner would make up the payment at the end of the loan term, a repayment structure similar to the pandemic hardship program introduced in 2020.

FHA loans are typically pooled into mortgage bonds that are sold to investors with government backing. To modify any features of the loan, the mortgage company must buy the loan out of the pool. The loan then needs to be reset to a market rate so that, once modified, it can be sold into a new pool.

The new payment supplement does not change the terms of the loan so it can stay in the pool at the current low interest rate. Investors continue to receive uninterrupted payments because of the amount of FHA origination.

Homeowner delinquencies spiked at the start of the pandemic, then dropped. Recently, they have begun to rise again. Among Ginnie Mae bonds that include FHA mortgages, about 2.39 percent of homeowners were 90 days or more delinquent on their mortgages in April, up from 2.25 percent a year earlier, according to JPMorgan Chase data.

The proposal will be open for 30 days of public feedback and will take effect some time thereafter.