The deadline for the mortgage industry to chime in on the Federal Housing Administration‘s (FHA) proposed 40-year loan modification rule was at the end of May. While four prominent trade groups voiced support, they also proposed some tweaks.
The Mortgage Bankers Association, Housing Policy Council, National Association of REALTORS and the American Bankers Association agreed a 40-year loan modification should be a permanent fixture in the administration’s loss mitigation handbook, suggesting it would benefit FHA borrowers and the administration.
The trade groups in tandem applauded the FHA for moving to align its loss mitigation policy with other housing agencies, including Fannie Mae and Freddie Mac.
It remains unclear when the FHA plans to add the 40-year loan modification option to its servicing and loss mitigation handbook. An FHA spokesman did not immediately respond to a request for comment.
In a letter to the FHA, Sharon Whitaker, vice president of the ABA, said the 40-year loan modification will help borrowers retain their homes after default and help mitigate losses to FHA’s Mutual Mortgage Insurance Fund. As of September 2021 the MMIF was nicely cushioned, with a capital ratio of 8.03% — almost four times the required statutory minimum.
Leslie Rouda Smith, president of the NAR, used her own letter to the FHA to explain the trade group has been “concerned” about the pandemic’s impact on the housing market.
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Smith said in the first quarter of 2022, 9.58% of FHA’s borrowers were in some stage of delinquency and this new tool will “help these borrowers sustain homeownership or help ease their transition.”
The MBA and HPC, in a mutually penned letter, supported the initiative, but with a caveat. They recommended the FHA allow servicers to qualify borrowers for home retention options at terms between 360 months and 480 months.
“This will allow servicers to ensure consumers are only extending loan terms beyond 360 months to the duration necessary to achieve affordability and home retention,” according to the letter.
The two trade groups said the 360-month loan modification option should be the bedrock of FHA’s loss mitigation menu. A 30-year loan mod option limits the amount of interest paid and helps borrowers accumulate equity in their homes more quickly, the groups said in the letter.
The proposed rule, originally published in early April, would change repayment provisions for FHA borrowers, allowing lenders to recast a borrower’s total unpaid loan for an additional 120 months. At the time, the Department of Housing and Urban Development said the 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 a lower monthly payment will help bring a borrower’s mortgage current, prevent imminent re-default and, ultimately, help borrowers retain their home.
But it’s not just a benefit to 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, according to HUD.
A few weeks after the administration published its proposed rule, the FHA added the 40-year loan modification to its COVID-19 loss mitigation waterfall. Currently, only borrowers financially affected by the pandemic can opt for the loss mitigation option, and it may only be used in combination with a partial claim.
The MBA and HPC in their recent letter to the FHA said making the 40-year loan modification permanent will create more certainty in the secondary market, but further clarification is required.
Despite Ginnie Mae introducing a designated security for extended term modifications in October 2021, there has been “limited data and loan volume to demonstrate a deep and liquid securitization market for these pools,” the trade group’s letter said.
It recommends an future evaluation of how pool variables affect pricing for the extended term modification.
“Ginnie Mae should continue to analyze the secondary market execution data for COVID-19 40-year modifications and publicly disclose trends to market participants to better
inform the future market rates for modifications and pricing,” HPC and MBA wrote.
“If necessary, FHA and Ginnie Mae should revise their policy, including adjustments to Ginnie Mae pooling parameters,” it said.
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