Until the end of May, the mortgage industry has to comment on the Federal Housing Administration’s (FHA) proposed 40-year loan modification regulation. While four major trade associations expressed approval, they also suggested some changes.

The Mortgage Bankers Association, Housing Policy Council, National Association of REALTORS, and American Bankers Association agreed that a 40-year loan modification should be a permanent fixture in the administration’s loss mitigation handbook, implying that it would benefit FHA borrowers as well as the administration.

The FHA has yet to announce when the 40-year loan modification option will be added to its servicing and loss mitigation guide. The new rule, first announced in early April, would amend FHA borrowers’ payback conditions, allowing lenders to recast a borrower’s entire unpaid loan for another 120 months. The Department of Housing and Urban Development claimed that the option might save several thousand borrowers from foreclosure each year.

According to the agency, borrowers will have more sustainable monthly payments if the recast mortgage is extended from 360 to 480 months. In addition, according to the proposed rule, a lower monthly payment will assist homeowners in bringing their mortgage current, avoiding impending re-default, and, eventually, keeping their homes.

The FHA incorporated the 40-year loan modification to its COVID-19 loss mitigation waterfall a few weeks after the government issued its proposed regulation. As a result, only borrowers who the pandemic has been financially impacted can utilize the loss mitigation option right now, and it can only be used in conjunction with a partial claim.

Making the 40-year loan modification permanent, according to the MBA and HPC in their latest letter to the FHA, will provide more certainty in the secondary market, but additional clarification is needed. To read more, click here.


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