FHA Unveils 40-Year Loan Modification Option
the Federal Housing Administration (FHA) set to expand its COVID-19 loss mitigation “cascade” by introducing a 40-year loan modification option and is seeking advice from the mortgage industry.
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 outstanding loan for an additional 120 months. HUD said this option could save “several thousand borrowers a year from foreclosure.”
By extending the term of the recast mortgage from 360 months to 480 months, borrowers will have longer-lasting monthly payments, the department said. The proposed rule noted that a lower monthly payment will help update a borrower’s mortgage, prevent another impending default and, of course, help borrowers keep their homes.
The proposed rule will be especially beneficial to FHA borrowers who have recently exited government-mandated forbearance but are struggling to make their mortgage payments due to financial hardship related to COVID-19.
In addition to benefiting borrowers, the rule would also reduce losses to the FHA Mutual Mortgage Insurance Fund, as fewer properties would be sold at a loss in foreclosure or from FHA-owned real estate inventory, said HUD.
A recent report released by the FHA found that in December 2021, 7.28% of FHA loans were seriously delinquent, compared to a seasonally adjusted high of 12.04% in March 2021. However, the rate is still high compared to the pre-pandemic period.
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HUD added that borrowers who opt for a 40-year loan modification would be subject to slower principal accumulation and additional interest payments, but the positive outcome of a borrower being able to keep their home should take away any negatives.
If implemented, the rule will align the FHA with other government entities, such as Fannie Mae, Freddie Macand the united states department of agriculturewhich already offer a 40-year loan modification term option.
Comments from the mortgage industry are expected by May 31.
FHA’s 40-year loan modification option has been in the works for 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 type of pool would ultimately be determined by the FHA.
Three months later, the FHA released a draft mortgage letter proposing a 40-year loan modification combined with a partial claim.
However, industry stakeholders, including Housing Policy Council and the Mortgage Bankers Association, required more time to adapt to the change. HPC and the MBA asked FHA to delay implementation of the new term until the first quarter of 2022. They also asked the government agency for a 90-day window to begin offering the loan modification.
“Demanding repairers implement a wide range of policy changes over the past few months has been difficult and we expect this to continue through the first quarter of 2022,” they said in a letter to the company. FHA.
In early February, Julienne Joseph, assistant assistant secretary in the Office of Single-Family Housing for FHA, said the government agency is “almost there” and “warming up” by offering the option to borrowers.
“Of course, we believe the clock is ticking, particularly as the national emergency has been extended,” she said at the 2022 MBA Servicing Solutions Conference & Expo in Orlando, Florida. On February 18, President Biden extended the declaration of national emergency for the COVID-19 pandemic beyond March 1.