FHA inches closer to offering a 40-year loan modification 

The Federal Housing Administration (FHA) is working to expand the COVID-19 loss mitigation program to include the option of a 40-year loan modification with a partial claim, an acknowledgement that some borrowers exiting forbearance are still facing financial challenges.

Julienne Joseph, deputy assistant secretary in the Office of Single-Family Housing for FHA at the U.S. Department of Housing and Urban Development (HUD), said that the government agency is “almost there” and “getting warmer” in offering the option to borrowers.  

“As far as the 40-year-old partial claim, I would say probably in the next 60 days we’ll be hearing more about what we can do there,” Joseph said Wednesday at the MBA’s Servicing Solutions Conference & Expo 2022 in Orlando, Florida.

She added: “Of course, we feel time is of the essence, especially because the national emergency has been extended.” On Feb. 18, President Biden extended the national emergency declaration for the COVID-19 pandemic beyond March 1.

HUD did not immediately return a request seeking additional information on its plans. 

In September, the FHA posted a draft mortgage letter proposing a 40-year loan modification combined with a partial claim. The goal is to help borrowers reach the targeted reduction of 25% of the monthly principal and interest portion of their mortgage payments.  

The FHA’s proposal came only after Ginnie Mae announced in June that it was set to introduce a new 40-year mortgage term for its issuers. Lenders and servicers had previously voiced concerns the government-owned enterprise would not be able to purchase the long-term loans, a mortgage lobbyist told Housingwire.

“We have begun the work to make this security product available because an extended term up to 40 years can be a powerful tool in reducing monthly payment obligations with the goal of home retention,” Michael Drayne, Ginnie Mae acting executive vice president, said in a statement.

Industry stakeholders sought more time to adjust to the change. In an October letter, the Housing Policy Council (HPC) and Mortgage Bankers Association (MBA) asked the FHA to delay implementing the new option until the first quarter of 2022. They also asked the government agency for a 90-day window to start offering the loan modification.

“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. 

The FHA is studying the right place to offer the 40-year loan modification with partial claim in the loss mitigation “waterfall,” which provides tiers of assistance to help borrowers pay their mortgage.

The new loan modification will likely be offered toward the end of that process, as the FHA does not want it to be too “intrusive,” according to Joseph. The option, which can help borrowers during the pandemic, may become part of the FHA’s standard modifications’ protocols.

Other government entities, such as Fannie Mae and Freddie Mac, already provide a 40-year loan modification term. According to the HUD website, its loan modification option extends the term of the mortgage to 360 months at a fixed interest rate. 

The partial claim, however, allows arrearages to be placed in a zero-interest subordinate lien against the property to be paid after the last mortgage payment, if the loan is refinanced or the property is sold, whichever occurs first.

The 40-year loan modification with partial claim combines both options. “It is for those who are obviously struggling the most. They may have gone back to work, but their incomes are lower than pre-pandemic,” a mortgage lobbyist who participated in the discussions with the FHA told HousingWire.

According to the latest MBA data, 650,000 homeowners were in forbearance plans as of January 31. Forborne loans in the Ginnie Mae portfolio decreased three basis points from December to January, to 1.60% of servicers’ portfolio volume.

During the last 19 months, MBA’s data revealed that 29.1% of the total forbearance exits resulted in a loan deferral or partial claim. About 19% of those borrowers continued to pay during the forbearance period. However, 17% were borrowers who did not make their monthly payments and did not have a loss mitigation plan. 

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