FHA to offer 40-year mods to COVID-affected borrowers

The Federal Housing Administration issued a mortgagee letter putting in place a 40-year mortgage modification option for borrowers who were affected by the pandemic.

This move is in addition to a notice the Department of Housing and Urban Development published earlier this month that it’s looking to createa permanent 40-year loan modification program.

This loss mitigation program works with the FHA partial claim option. It is designed to help those borrowers who cannot achieve a minimum targeted 25% reduction in principal and interest using the FHA's existing 30-year mortgage modification with a partial claim.

Mortgage servicers may begin implementing the 40-year modification immediately but must begin offering this solution to eligible FHA borrowers within 90 calendar days.

"Over the last year we have made substantive changes to our COVID-19recovery options that are showing strong results in helping homeowners with FHA-insured mortgages recover from the devastating financial effects of the pandemic," said Principal Deputy Assistant Secretary for Housing and the Federal Housing Administration Lopa P. Kolluri in a press release. "Adding a 40-year modification with partial claim to our toolkit for servicers today reaffirms our long-term commitment to continue helping as many struggling homeowners as we can to keep their homes."

As of April 12, nearly 248,000 FHA and Veterans Affairs mortgages are in a forbearance plan, up by 600 over the previous week, according to Black Knight. Approximately 2% of all outstanding FHA/VA loans were in forbearance, with a total unpaid principal balance of $44 billion.

The mortgagee letter adds two more steps to the COVID loss mitigation waterfall that follow if the borrower cannot meet the target payment reduction for a 30-year mortgage following principal deferment.

The first new step involves modification of the rate and term for a 40-year mortgage. If that doesn't meet the target payment reduction, principal deferment using partial claims funds can be attempted.

However, the final step remains offering the borrower the lowest principal and interest payment achieved using the COVID-19 Recovery Modification program.

Loans funded by mortgage revenue bonds, which are restricted by the Internal Revenue Code to extend the loan term beyond the original 30 years or don't allow for the interest rate to be modified, are exempt from the 40-year program.