FHA introduces 40-year loan modification for pandemic-induced hardships

To assist as many borrowers as possible who are behind on their mortgage payments due to the COVID-19 pandemic, the Federal Housing Administration (FHA) announced the addition of a 40-year loan term as a modification option.

Meant to be used in conjunction with the FHA’s partial claim option, the new loss-mitigation program is aimed at helping borrowers who can’t achieve a 25% reduction in the principal and interest portion of their mortgage payment through the FHA’s current 30-year loan modification. Stretching the term limit to 480 months from 360 months, according to the FHA, will allow borrowers to further reduce their monthly payments, give them a better chance to get their loans current and avoid losing their homes.

The modification was first proposed on April 1 and a public comment period on the rule is open until May 31. Per the rule proposal published in the Federal Register, the U.S. Department of Housing and Urban Development (HUD) believes that a 40-year loan modification could prevent “several thousand borrowers a year” from entering foreclosure. And while borrowers who choose a 40-year loan modification would be subjected to a slow pace of equity building along with additional interest payments over the course of the extended term, HUD stated that such drawbacks are outweighed by the opportunity for borrowers to retain their homes through a more sustainable payment plan.

Servicers of mortgages backed by the FHA can offer the modification immediately, and they must begin offering it as an option to eligible borrowers within 90 days.

“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 P. Kolluri, principal deputy assistant secretary for the FHA’s Office of 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.”

Currently, only borrowers who were affected financially by the COVID-19 pandemic are eligible to apply for the modification, although the FHA appears to be considering making the option a permanent addition to its loss-mitigation policies. The FHA noted in a statement that the 40-year modification is consistent with similar provisions available from others in the mortgage industry, including Fannie Mae and Freddie Mac.

Not all FHA loans will qualify for the 40-year option. Some loans funded via mortgage revenue bonds, for example, may not be eligible. According to a letter from HUD, this is to ensure that mortgages that rely on such bonds — particularly those offered by state housing-finance agencies — remain in compliance with the terms of their bond agreements and their restrictions through the Internal Revenue Service code.


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