The Department of Housing and Urban Development (HUD) and the Federal Housing Administration (FHA) are seeking to initiate a new 40-year loan modification program to help mortgage borrowers and lenders streamline the loss mitigation process.
The proposed rule, published by HUD late last week, would change repayment provisions for FHA borrowers, allowing lenders to modify a borrower’s total unpaid loan for an additional 120 months.
HUD said that this option could prevent “several thousand borrowers a year from foreclosure.”
According to HUD, the proposed change would allow FHA lenders to modify mortgages where borrowers experience long-term COVID-19 forbearance due to job or income loss, or where the borrower is subject to an extension of forbearance or additional payment period.
“This will give these borrowers longer periods of time to recover financially before their mortgage payments go back up to their original amount,” said HUD Secretary Marcia L. Fudge.
As part of the plan, if a lender chooses to offer a 40-year modified mortgage to an eligible FHA borrower, the agency will reimburse 100% of the unpaid principal balance owed on the loan at the time of modification. The reimbursement will be made in one lump sum payment upon completion of all terms and conditions in the modification agreement.
HUD also specifies that the monthly payment on a 40-year loan must be no less than the payment on a 30-year loan because it would not want to encourage borrowers to take out loans they can’t afford.
To qualify for the option, FHA borrowers will need to provide documentation demonstrating functionality in their repayment plans and show that they can afford monthly payments based on their current income levels.
Borrowers must also be current on their mortgage payments for at least 12 consecutive months following the modification under this proposal. The proposal is not available for borrowers who are currently in bankruptcy proceedings or who have already had one or more delinquencies within 24 months of their modification request.
In addition, the proposed rule would allow lenders to process loan modifications for delinquent borrowers in cases where they would otherwise be ineligible due to delinquency. Additionally, HUD said that it is considering additional special application and income verification procedures.
“Since March, HUD has been focused on protecting our nation’s homeowners from the financial impacts of COVID-19 through our innovative loss mitigation strategies and programs,” said HUD Secretary Ben Carson. “We believe that this proposed expansion will allow thousands more struggling families to keep their homes and provide them with time to get back on their feet after this challenging time.”
In June, the FHA introduced a new long-term loss mitigation program for borrowers impacted by the COVID-19 pandemic. The new “waterfall” included a six-month forbearance option, the extension of temporary COVID-19 loss mitigation options, and a new permanent FHA COVID-19 loss mitigation option.
HUD said it believes that this proposed change will help streamline loss mitigation efforts for FHA-insured single family mortgages and will ease the operational burden on its lenders. This new option would allow eligible mortgages currently in forbearance or in default due to COVID-19 related hardships to access longer-term modifications.
The FHA is looking to the mortgage industry to help the agency determine if the 40-year loan modification program is a good idea. The agency is currently taking comments from lenders and other interested parties about the current loss mitigation options, including whether or not a 40-year loan mod should be made available.
Moe Bedard is the founder and lead mortgage analyst for LoanSafe.org. Since 2007, LoanSafe has helped over 2 million consumers with solutions to their mortgage problems and has been featured in the New York Times, LA Times, Fox Business, and many other media publications.