FHA publishes final rule on the 40-year loan modification

The rule was codified in a Mortgagee Letter this week after a public comment period that took place last year

The Federal Housing Administration (FHA) announced this week that a final rule related to an increased 40-year loan modification term has been published in the Federal Register. The rule allows mortgagees to increase the maximum term of an FHA-insured mortgage loan modification from 360 to 480 months following a default.

The FHA also published Mortgagee Letter 2023-06, which establishes the policies for FHA lenders. The rule is slated to go into effect on May 8.

“Specifically, the final rule will permit mortgagees to provide a 40-year loan modification to borrowers,” FHA said in the informational notice. “The provisions of the final rule will expand FHA’s loss mitigation options to include a standalone 40-year loan modification. The 40-year loan modification can assist borrowers in avoiding foreclosure by spreading the outstanding mortgage balance over a longer period, thereby making their monthly payments more affordable.”

After the proposal was unveiled last year, the U.S. Department of Housing and Urban Development (HUD) added that it would reduce losses to the FHA’s Mutual Mortgage Insurance (MMI) Fund, as fewer properties would be sold out of the FHA’s real estate owned inventory or at a loss due to foreclosure.

The FHA permitted public comment from stakeholders between April 1 and May 31, 2022, and it credits the input for the decision to move forward with the new policy.

“Public comments to the proposed rule were overwhelmingly supportive of the 40-year loan modification option and recognized the many benefits to borrowers,” the FHA said. “This final rule provides mortgagees with an additional option to help borrowers bring their mortgages current and avoid losing their homes.”

This new rule also aligns the FHA modification option requirements available for Fannie Mae– and Freddie Mac-backed mortgages, the agency said.

Last April, the FHA unveiled the potential to incorporate the policy as an addition to the agency’s COVID-19 loss mitigation waterfall, enlisting public comment from mortgage industry participants.

At the time, the FHA established that extending the length of a recast mortgage from 30 to 40 years would result in more sustainable monthly payments.

Members of the Mortgage Bankers Association, Housing Policy Council, National Association of Realtors and the American Bankers Association expressed support for a 40-year loan modification option to be permanently added to FHA’s loss mitigation program when the proposal was unveiled last year.

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