HUD Issues Proposal for 40-Year Modifications

Source: National Mortgage News (subscription may be required)

The Department of Housing and Urban Development has formally proposed to amend regulations to accomodate 40-year modifications that Ginnie Mae has been preparing to securitize.

The proposal, published Friday in the Federal Register, calls for the modifications of Federal Housing Administration-insured mortgages to be structured somewhat like those available for loans other agencies oversee. Forty-year modifications are available for loans backed by government-sponsored enterprises Fannie Mae and Freddie Mac and the U.S. Department of Agriculture, or made by institutions regulated by the National Credit Union Administration.

Allowing the FHA to do something similar would broaden servicers’ ability to offer more affordable modifications of loan terms to distressed borrowers who may be exiting forbearance with long-term income reductions due to the pandemic.

"It is great that they are aligning with the other agencies," said Marissa Yaker, managing attorney, regulatory affairs, at the Padgett Law Group, in an interview about the FHA’s proposal. "You want to continue providing borrowers with all the options they can have."

FHA borrowers with a 40-year mod may be able to get larger payment reductions than with a 30-year one, a recent Federal Reserve Bank of Philadelphia report suggests. An average 28% reduction in principal and interest may be possible with a 40-year mod, compared to 26% for a 30-year term. When P&I is combined with tax and insurance payments, the reduction would be 18% compared to 17%.

Extending the term of FHA modifications may not only further reduce payments for borrowers but make payment reductions less onerous for lenders, Patrick Harker, president and CEO of the Federal Reserve Bank of Philadelphia said in a speech at the Center for Financial Stability in New York on Thursday.

“Lenders may want to consider solutions that limit the costs of modification while providing more payment relief to borrowers,” Harker said. “One such solution is for the Federal Housing Administration to offer 40-year mortgage modifications.”

FHA-insured loans are made to lower-income borrowers who have less of a financial cushion than others, and their forbearance rates — while drastically reduced from pandemic highs — tend to outpace those seen in the larger Fannie Mae and Freddie Mac market.