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FHA unveils 40-year loan modification option

FHA's COVID-19 loss mitigation options may soon include a 40-year loan modification option

The Federal Housing Administration (FHA) is moving to expand its COVID-19 loss mitigation “waterfall” by introducing a 40-year loan modification option and is asking the mortgage industry for input.

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

By prolonging the length of the recast mortgage from 360 months to 480 months, borrowers will have more sustainable monthly payments, the department said. The proposed rule noted that a lower monthly payment will help bring a borrower’s mortgage current, prevent imminent re-default, and of course, help borrowers retain their home.

The proposed rule will specifically be beneficial for FHA borrowers who recently exited government-mandated forbearance but are struggling to make their mortgage payments because of COVID-19 related financial hardships.

Alongside of benefitting borrowers, the rule would also 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, HUD said.

A recent report published by the FHA revealed that as of December 2021, 7.28% of FHA loans were seriously delinquent, down from a seasonally adjusted high of 12.04% in March 2021. However, the rate is still elevated compared to pre-pandemic times.

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HUD added that borrowers who opt for a 40-year loan modification would be subject to slower equity accumulation and additional interest payments, but that the positive outcome of a borrower being able to retain their home should outweigh any negatives.

If implemented, the rule will align the FHA with other government entities, such as Fannie Mae, Freddie Mac, and the United States Department of Agriculture, which already provide a 40-year loan modification term option.

Comments from the mortgage industry are due by May 31.

FHA’s 40-year loan modification option has been in the works for quite some time.

In June 2021, Ginnie Mae announced that it was set to introduce a 40-year mortgage term for its issuers, but that the terms and extent of use of the new pool type would be ultimately determined by the FHA.

Three months later, the FHA posted a draft mortgage letter proposing a 40-year loan modification combined with a partial claim.

However, industry stakeholders, including the Housing Policy Council and the Mortgage Bankers Association, sought more time to adjust to the change. HPC and the MBA asked the FHA to delay the implementing of the new term until the first quarter of 2022. They also asked the government agency for a 90-day window to start offering the loan modification.

“The demand on servicers to implement a wide array of policy changes over the last several months has been challenging and we expect this to continue well into the first quarter of 2022,” they said in a letter to FHA. 

In early February, Julienne Joseph, deputy assistant secretary in the Office of Single-Family Housing for FHA, said that the government agency is “almost there” and “getting warmer” in offering the option to borrowers.  

“Of course, we feel time is of the essence, especially because the national emergency has been extended,” she said at the MBA’s Servicing Solutions Conference & Expo 2022 in Orlando, Florida. On Feb. 18, President Biden extended the national emergency declaration for the COVID-19 pandemic beyond March 1.

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