The U.S. Department of Housing & Urban Development (HUD) has published a Final Rule in the Federal Register its intent to increase the maximum allowable term for Federal Housing Administration (FHA)-insured loan modifications from 360 months to 480 months (40 months). The new rule will become effective Monday, May 8, 2023.
On April 1, 2022, the FHA published a Proposed Rule in the Federal Register to solicit public comments on a proposal to allow mortgage servicers to provide a standalone 40-year loan mod option for struggling homeowners.
Increasing the maximum term limit to 480 months will allow mortgagees to further reduce the borrower’s monthly payment as the outstanding balance would be spread over a longer time frame, providing more borrowers with FHA-insured mortgages the ability to retain their homes after default. This change will also align FHA with modifications available to borrowers with mortgages backed by Fannie Mae and Freddie Mac. This final rule adopts HUD’s April 1, 2022, proposed rule without change.
“Adding the 40-year loan modification to FHA’s loss mitigation toolkit creates better alignment across the government and with Fannie Mae and Freddie Mac, a long-standing MBA priority that we most recently recommended in our new White Paper on the future of loss mitigation,” said Mortgage Bankers Association (MBA) President and CEO Robert D. Broeksmit, CMB. “Better alignment will improve consumer experience and lead to consistency and simplicity when addressing adverse market conditions, national emergencies, and natural disasters.”
Public feedback during the public comment period supported the proposal, stating that a 40-year loan modification option would be a valuable tool, providing significant relief for struggling borrowers. Commenters added that extended maximum loan terms allow lenders to further reduce monthly mortgage payments, thus assisting struggling borrowers in retaining their homes, and avoiding foreclosure. One of the 20 commenters noted that borrowers who re-default after utilizing other loss mitigation methods (such as a partial claim) have few options for retaining their homes. Commenters felt that the current 30-year term maximum loan modifications are sometimes insufficient to provide affordable monthly payments for defaulting borrowers.
Prior to the Proposed Rule, HUD’s regulations allowed mortgagees to modify an FHA-insured mortgage by recasting the total unpaid loan for a term limited to 360 months to cure a borrower’s default.
Earlier this year, the FHA expanded its loss mitigation options to all eligible borrowers who fell behind on their mortgage payments, regardless of the cause of their delinquency.
"We are committed to ensuring that no FHA borrower experiences foreclosure unnecessarily," said Assistant Secretary for Housing and Federal Housing Commissioner Julia Gordon earlier this year. "FHA's COVID-19 forbearances and streamlined COVID-19 loss mitigation options have successfully helped millions of struggling borrowers in the last two fiscal years alone. Our actions let us capitalize on what we have learned through the pandemic to continue helping borrowers avoid foreclosure, regardless of the nature of their hardship."
As published in the Federal Register, HUD recognized that, since the Proposed Rule was published last April, interest rates have increased to edge toward the 7% mark. HUD cited that the increase in rates may decrease the effectiveness of a modification in providing significant payment reduction, because the modified loan may be at a higher interest rate than the original loan. HUD believes that this rule will provide a critical home retention tool for borrowers as interest rates change over the long term.
“MBA appreciates FHA’s engagement with mortgage servicers and other industry stakeholders on this issue–especially from the onset of the pandemic through the upcoming end to the national emergency,” added Broeksmit. “We will continue to work with FHA and Ginnie Mae to ensure effective solutions and favorable outcomes for distressed borrowers, while also protecting the Mutual Mortgage Insurance Fund and ensuring secondary market certainty.”