FHA’s COVID-19 loss mitigation programs may include a 40-year loan modification option to combat the foreclosure wave experts are predicting to hit in 2022
The Federal Housing Administration (FHA) is making final preparation to expand its COVID-19 loss mitigation “waterfall” by introducing a 40-year loan modification option. The news could not come soon enough. Our firm has been receiving hundreds of calls and help applications from homeowners across the country who are severely delinquent on their FHA home loans. With the loans insured from any loss due to foreclosure by the FHA, the mortgage companies servicing these mortgages have absolutely no motivation or urgency to help the homeowners. In the past it has been difficult for our legal team to negotiate affordable payment plans for clients due to the 30 year limit restriction. the new 40 year proposal will be very helpful in bringing down payments for homeowners who are in foreclosure on FHA insured loans.
The proposed rule, published by the Department of Housing and Urban Development last week, would change repayment provisions for FHA insured mortgages, allowing lenders to recast a borrower’s total unpaid loan for an additional 120 months (10 years). From the standard 30 year, to the longer 40 year in an effort to assist homeowners with more affordable lower payments. HUD spokespersons have stated that this option could prevent “several thousand borrowers a year from foreclosure.”
By extending the length of the recast mortgage from 360 months to 480 months, borrowers will have more sustainable monthly payments, the department said. The proposed rule noted that a lower monthly payment will help bring a borrower’s mortgage current, avoid imminent re-default, and more importantly, help borrowers retain their home.
The proposed rule will specifically be beneficial for FHA borrowers who recently exited government-mandated forbearance but are struggling to make their mortgage payments because of COVID-19 related financial hardships.
Alongside benefitting borrowers, the rule would also reduce losses to FHA’s Mutual Mortgage Insurance Fund as fewer properties would be sold at a loss in foreclosure or out of FHA’s real estate owned inventory, HUD said. This statement however has met with some scrutiny by industry experts since the high majority of homes (even FHA insured mortgage held homes) have experienced drastic increases in property values during the pandemic.
A recent report published by the FHA revealed that as of December 2021, 7.28% of FHA loans were seriously delinquent, down from a seasonally adjusted high of 12.04% in March 2021. However, the rate is still elevated compared to pre-pandemic times.
HUD stated that borrowers who opt for a 40-year loan modification would be subject to slower equity accumulation and additional interest payments, but that the positive outcome of a borrower being able to retain their home should outweigh the negatives.
If implemented, the rule will align the FHA with other government entities, such as Fannie Mae, Freddie Mac, and the United States Department of Agriculture, which already provide a 40-year loan modification term option..
FHA’s 40-year loan modification option has been in the works for quite some time.
In June 2021, Ginnie Mae announced that it was set to introduce a 40-year mortgage term for its issuers, but that the terms and extent of use of the new pool type would be ultimately determined by the FHA.
A few months later, the FHA posted a draft mortgage letter proposing a 40-year loan modification combined with a partial claim.
However, industry stakeholders, including the Housing Policy Council and the Mortgage Bankers Association, sought more time to adjust to the change. HPC and the MBA asked the FHA to delay the implementation of the new term until the first quarter of 2022. These mortgage industry power brokers also requested from the government agency for a 3 month window to begin providing the loan modification to homeowners facing foreclosure.
“The demand on servicers to implement a wide array of policy changes over the last several months has been challenging and we expect this to continue well into the first quarter of 2022,” they said in a letter to FHA.
In early February, Julienne Joseph, deputy assistant secretary in the Office of Single-Family Housing for FHA, stated that the government agency is “almost there” and “getting warmer” in offering the option to borrowers.
“Of course, we feel time is of the essence, especially because the national emergency has been extended,” she said at the MBA’s Servicing Solutions Conference & Expo 2022 in Orlando, Florida. On Feb. 18, President Biden extended the national emergency declaration for the COVID-19 pandemic beyond March 1.
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