Government LendingMortgage

FHA adds 40-year loan term to COVID-19 arsenal

Effective immediately, mortgage servicers can offer borrowers the 40-year loan modification option bundled with a partial claim

The Federal Housing Administration told mortgage servicers that they can now offer a 40-year loan term as a COVID-19 recovery option.

Servicers for FHA-insured mortgages can offer the modification immediately, according to the latest update to FHA’s mortgage lending policies. For now, only borrowers financially impacted by the pandemic can opt for the loss mitigation option, and it may only be used in combination with a partial claim option.

The administration said that the new loss mitigation option could be an alternative for borrowers who cannot reduce their principal and interest payments by 25% through FHA’s existing 30-year mortgage modification with a partial claim.

Mortgage servicers can use the loss mitigation option immediately, but after 90 calendar days, servicers will be required to offer it, the FHA said.

The administration added that some loans funded through mortgage revenue bonds may not qualify for the new loss mitigation option. According to the administration’s mortgagee letter, it added the exemption to ensure that mortgagees that rely on bonds, primarily those state Housing Finance Agencies offer, meet the terms of their bond agreements.

In these cases, the FHA said that it encourages mortgagees and borrowers to use its extensive network of housing counselors to help explain and expedite additional relief.

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Lopa Kolluri, FHA principal deputy assistant secretary for housing, said in a statement that the administration has already seen “strong results” as a result of its COVID-19 recovery options.

“Adding a 40-year modification with partial claim to our toolkit for servicers today reaffirms our long-term commitment to continue helping as many struggling homeowners as we can to keep their homes,” said Kolluri.

The administration is also moving to make the 40-year loan modification option a permanent fixture in its loss mitigation handbook.

In early April, the FHA initiated a rule making process to allow all borrowers with FHA-insured loans, regardless of whether they were financially impacted by the pandemic, to opt for a 40-year loan modification, if necessary.

The proposed rule would change repayment provisions for FHA borrowers, allowing lenders to recast a borrower’s total unpaid loan for an additional 120 months. The Department of Housing and Urban Development said that the implementation of such an option could prevent “several thousand borrowers a year from foreclosure.”

By increasing the length of the mortgage term to 480 from 360 months, borrowers will have more sustainable monthly payments, the department said in early April. The proposed rule stated that a lower monthly payment will help borrowers become current on their mortgage, prevent re-default and help borrowers keep their home.

In addition to benefitting borrowers, the HUD hopes the rule would reduce losses to FHA’s Mutual Mortgage Insurance Fund as fewer properties would be sold at a loss in foreclosure or out of FHA’s real estate owned inventory.

Comments from the mortgage industry are due by May 31.

Other government entities, including Fannie Mae, Freddie Mac and the United States Department of Agriculture, have already implemented a 40-year loan modification term option.

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