FHA Proposes 40-Year Mortgage Loan Modification Option

The U.S. Department of Housing and Urban Development (HUD) is asking for mortgage industry input on a proposed rule change that it offered late last week, which would change repayment provisions for FHA borrowers. The change would allow lenders to recast a borrower’s total unpaid loan for an additional 120 months. HUD says that this option could prevent “several thousand of borrowers a year from foreclosure.”

According to HUD, by prolonging the length of the recast mortgage from 360 months to 480 months, borrowers will have more sustainable monthly payments. The proposed rule noted that a lower monthly payment will help bring a borrower’s mortgage current, prevent imminent re-default, and, of course, 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-related financial hardships.

Alongside of 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. 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 added 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 any 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.