A final rule from the U.S. Department of Housing and Urban Development (HUD) that offers stand-alone 40-year modifications to loans insured by the Federal Housing Administration (FHA) has been added to the Federal Register.
The change was first announced in April of last year and was originally meant to assist borrowers who were behind on their mortgage due to the COVID-19 pandemic. Designed 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. While 40-year mortgages remain rare, they have become more common, including via loans backed by Fannie Mae and Freddie Mac, as well as loan modifications offered by Ginnie Mae and the U.S. Department of Agriculture.
Per the original rule proposal published in the Federal Register, HUD believes that a 40-year loan modification could prevent “several thousand borrowers a year” from entering foreclosure.
While borrowers who choose a 40-year loan modification would be subjected to a slow pace of equity growth 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. And comments solicited by HUD during a public feedback period noted that current adverse market conditions, including the rising interest rate environment, have heightened the importance of creating additional tools to help struggling borrowers.
Bob Broeksmit, president and CEO of the Mortgage Bankers Association (MBA), lauded the adoption of the final rule.
“This additional tool will allow mortgage servicers to help struggling FHA borrowers stay in their homes through a more affordable and sustainable mortgage payment,” Broeksmit said.
“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 longstanding MBA priority that we most recently recommended in our new white paper on the future of loss mitigation. Better alignment will improve consumer experience and lead to consistency and simplicity when addressing adverse market conditions, national emergencies and natural disasters.”