The Federal Housing Administration (FHA) has announced that it is adding a new, 40-year mortgage modification option for mortgage servicers to use in conjunction with its partial claim option to assist additional borrowers who are behind on their mortgage payments for FHA Title II forward mortgages [1].
The 40-year mod option was designed to assist borrowers who cannot achieve a minimum targeted 25% reduction in the Principal and Interest (P&I) portion of their mortgage payment through FHA’s existing 30-year mortgage modification with a partial claim.
The FHA reports that from January 2021 through February 2022, FHA servicers have completed more than one million COVID-19 loss mitigation or other FHA loss mitigation home retention actions.
On April 1, 2022, FHA published a proposed rule in the Federal Register [2] to solicit public comments on a proposal to allow mortgage servicers to provide a standalone 40-year loan mod option for struggling homeowners. The public comment period closes on May 31, 2022, and when finalized, the Rule will give the FHA the ability to add a permanent 40-year term to its loss mitigation options.
“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 Principal Deputy Assistant Secretary for Housing and the Federal Housing Administration Lopa P. Kolluri [3]. “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.”
Mortgage servicers may begin implementing the new 40-year modification with partial claim option immediately, but must begin offering this solution to eligible borrowers with FHA-insured Title II forward mortgages, except those funded through Mortgage Revenue Bonds under certain circumstances, within 90 calendar days.
The 40-year modification with partial claim is now included as a component of FHA’s COVID-19 Recovery Modification and is consistent with 40-year modification options provided by other mortgage industry participants. The 40-year modification with partial claim is to be used by servicers for borrowers where FHA’s other recovery options are unable to achieve the minimum targeted 25% reduction.
According to the FHA, since January 2021 alone, more than 1.1 million borrowers have exited forbearance, while the rate of seriously delinquent mortgages has significantly decreased from a high of 11.90% (942,000 mortgages) at the end of November 2020 to 6.48% (474,000 mortgages) as of February 2022, due in large part to the effectiveness of FHA’s loss mitigation home retention options.
FHA’s COVID-19 Recovery options for use by mortgage servicers include the COVID-19 Advance Loan Modification (ALM) [4]. Available to owner-occupant and non-occupant borrowers, the COVID-19 ALM is a permanent change in one or more terms of a borrower’s mortgage that achieves a minimum 25% reduction to the borrower’s monthly P&I payment, and does not require borrower contact. Mortgage servicers will proactively mail the modified mortgage documents to borrowers who can achieve the required payment reduction. If the borrower chooses to accept the COVID-19 ALM they only need to sign and return the mortgage modification documents sent to them by their mortgage servicer.
FHA’s current COVID-19 Loss Mitigation Home Retention [4] “waterfall” of options for servicers to use with eligible owner-occupant borrowers with FHA-insured Title II forward mortgages contains the following:
- COVID-19 Recovery Standalone Partial Claim: For borrowers who can resume making their current mortgage payments, the COVID-19 Recovery Standalone Partial Claim allows mortgage payment arrearages to be placed in a zero-interest subordinate lien against the property. The Partial Claim amount does not require payment until the first of the following events occurs: the maturity of the FHA-insured mortgage, the sale of the property, the payoff of the FHA-insured mortgage, or if provided for under the Partial Claim note, the termination of FHA insurance, except that HUD will agree to subordinate the Partial Claim note to an FHA-Streamline Refinance.
- COVID-19 Recovery Modification: For borrowers who cannot resume making their current monthly mortgage payments, the COVID-19 Recovery Modification resolves the outstanding mortgage payment arrearages by adding it to the principal loan balance of the first mortgage. The mortgage servicer then extends the term for 30 years (360 months) at an interest rate that is no greater than the current fixed market interest rate identified in FHA policy as of the date the borrower is offered a COVID-19 Recovery Modification, or extends the term for 40-years (480 months) at an interest rate that is no more than 50 basis points greater than the current fixed market interest rate identified in FHA policy as of the date the borrower is offered a COVID-19 Recovery Modification.