That Federal Housing Administration told mortgage lenders that they can now offer a 40-year loan period as a COVID-19 recovery option.
Service providers for FHA-insured mortgages can offer the change immediately, according to the latest update of FHA’s mortgage lending policies. So far, only borrowers who are financially affected by the pandemic can choose the loss reduction option, and it may only be used in combination with a partial compensation option.
The administration said the new loss reduction option could be an alternative for borrowers who cannot reduce their principal and interest payments by 25% through FHA’s existing 30-year mortgage change with a partial claim.
Mortgage lenders can use the loss limitation option right away, but after 90 calendar days, service companies will be required to offer it, the FHA said.
The administration added that some loans financed through mortgage bonds may not qualify for the new loss reduction option. According to the administration’s mortgage deed, it added the exemption to ensure that mortgage-backed mortgage lenders, primarily those offered by state housing finance agencies, meet the terms of their bond agreements.
In these cases, the FHA said it encourages mortgagees and borrowers to use its extensive network of housing advisors to help explain and expedite further relief.
Lopa Kolluri, FHA’s Primary Assistant Assistant Secretary for Housing, said in a statement that the administration has already seen “strong results” as a result of its COVID-19 recovery options.
“Adding a 40-year modification with partial claims to our service toolkit today confirms our long-term commitment to continue to help as many struggling homeowners as we can keep their homes,” Kolluri said.
The administration is also moving to make the 40-year loan modification option a fixed component of its loss reduction handbook.
In early April, the FHA launched one rule making process to provide all borrowers with FHA-insured loans, whether or not they were financially affected by the pandemic, to opt for a 40-year loan change if necessary.
It suggested the rule would change repayment terms for FHA borrowers so lenders can reshape a borrower’s total unpaid loans for an additional 120 months. That Department of Housing and Urban Development said the implementation of such an option could prevent “several thousand borrowers a year from foreclosure.”
By increasing the length of the mortgage term to 480 from 360 months, borrowers will have more durable monthly payments, the department said in early April. The proposed rule stated that a lower monthly payment will help borrowers stay updated on their mortgages, prevent re-deposits and help borrowers keep their homes.
In addition to benefiting borrowers, HUD hopes the rule will reduce losses to FHA’s mutual mortgage insurance fund, as fewer properties will be sold at a loss on foreclosure or out of FHA’s property-owned portfolio.
Comments from the mortgage industry are due no later than 31 May.
Other government entities, including Fannie Mae, Freddie Mac and US Department of Agriculturehas already implemented a 40-year loan modification period.