FHA’s COVID-19 loss mitigation options may soon include a 40-year loan modification option

The Federal Housing Administration (FHA) is moving to expand its COVID-19 loss mitigation “waterfall” by introducing a 40-year loan modification option and is asking the mortgage industry for input.

The proposed rule, published by the Department of Housing and Urban Development late last week, would change repayment provisions for FHA borrowers, allowing lenders to recast 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.”

By prolonging the length of the recast mortgage from 360 months to 480 months, borrowers will have more sustainable monthly payments, the department said. 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-19 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.