Newsletter — May 2022
Mortgage servicers can now offer a 40-year loan modification as part of the COVID-19 Recovery waterfall. For now, only borrowers with FHA Title II forward mortgages who were financially affected by the pandemic are eligible, and the option must be used in conjunction with a partial claim.
The 40-year loan modification option offers another alternative for borrowers who can’t reduce their mortgage payments by 25% with the 30-year modification with a partial claim already being offered through the FHA.
“Over the last year we have made substantive changes to our COVID-19 recovery options that are showing strong results in helping homeowners with FHA-insured mortgages recover from the devastating financial effects of the pandemic,” said Lopa Kolluri, FHA principal deputy assistant secretary for housing.
“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.”
FHA servicers completed more than a million loss-mitigation actions from January 2021 to February 2022, and the FHA serious delinquency rate has decreased from 11.90% in November 2020 to 6.48% in February.
By extending mortgage terms from 360 months to 480 months, the 40-year option will help more borrowers bring their monthly payments down to a sustainable level.
In addition to preventing thousands of borrowers per year from foreclosure, HUD expects the move to reduce losses to FHA’s Mutual Mortgage Insurance Fund as fewer properties sell at a loss in foreclosure.
FHA’s 40-year modification plan was first proposed in 2021, but industry stakeholders, such as the Mortgage Bankers Association and Housing Policy Council, asked the administration to delay implementation to give them time to adjust to the change. Fannie Mae, Freddie Mac, and some other government entities already offer a 40-year loan modification option.
The FHA published a proposed rule in the Federal Register soliciting comments on allowing servicers to provide a standalone 40-year modification option for struggling borrowers. Once it’s finalized, the rule will enable the FHA to add a permanent 40-year term to its loss mitigation arsenal. The comment period closes May 31.
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