FHA Proposes 40-year Loan Modification Option as a Way to Minimize Defaults
Written By: Joel Palmer, Op-Ed Writer
The Federal Housing Administration (FHA) released a proposed rule earlier this month that would add a 40-year loan modification option to its loss mitigation options.
Currently, mortgagees can modify an FHA insured mortgage by recasting the total unpaid loan for a 30-year term to cure a borrower’s default. The proposed rule would enable mortgagees to recast an unpaid loan to a 40-year term.
“Increasing the maximum term limit to 480 months would 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,” said the proposed rule.
The Department of Housing and Urban Development (HUD), which published the proposed rule, said the change would align FHA with modifications available to borrowers with mortgages backed by Fannie Mae and Freddie Mac, which both currently provide a 40-year loan modification option.
“Allowing mortgagees to provide a 40-year loan modification would support HUD’s mission of fostering homeownership by assisting more borrowers with retaining their homes after a default episode while mitigating losses to FHA’s Mutual Mortgage Insurance (MMI) Fund,” HUD wrote in the proposed rule.
“HUD believes there are situations in which a mortgagee seeks to engage in loss mitigation but is unable to provide loss mitigation to a degree sufficient to prevent default. In such cases, an additional 120 months on the length of the recast mortgage would allow for a lower, more sustainable monthly payment.”
The proposed rule states that lower monthly payments offered through a 40-year mortgage is a key element to bring the mortgage current, prevent imminent default, and ultimately retain their home and continue to build wealth through homeownership. HUD estimates this change could keep several thousand borrowers a year out of foreclosure.
“Given the large number of FHA-insured mortgages that have been originated or refinanced in the past few years in a historically low interest rate environment, simply extending out the term of a mortgage in default for another 30 years at a similar interest rate would not provide a substantial reduction to a borrower’s monthly mortgage payment,” HUD wrote.
HUD noted that borrowers impacted by the COVID–19 pandemic may need a 40-year loan modification to obtain affordable monthly payments.
While the 40-year loan would result in slower equity accumulation and additional interest payments over the course of the modified mortgage, FHA data shows the average life of a 30-year FHA-insured mortgage is about seven years.
HUD noted that, in addition to Fannie and Freddie, other entities recognize the 40-year mortgage loan, including the National Credit Union Association and the U.S. Department of Agriculture.
HUD is seeking comments from the mortgage industry through May 31, 2022. You can submit comments to the proposed rule through the Federal eRulemaking Portal at http:// www.regulations.gov
About the Author
As an NAMU® Opinion Editorial Contributor, Joel Palmer is a freelance writer who spent 10 years as a business and financial reporter and another 10 years in marketing for the insurance and financial services industries. He regularly writes about the mortgage industry, as well as residential and commercial real estate, investments, and retirement income planning. He has also ghostwritten books on starting a business, marketing, and retirement income planning.
