The Federal Housing Administration (FHA) announced Wednesday that it’s increasing the maximum term for a mortgage modification to 40 years or 480 months. The previous term limit was 30 years or 360 months.
The federal agency suggested the move would protect borrowers against default if they had lower monthly payments.
The new regulation aims to help homeowners retain their homes after defaulting by allowing mortgagees to further reduce the borrower's monthly payment, since the outstanding balance would be spread over a longer time frame.
The change will align FHA with modifications available to borrowers with mortgages backed by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corp. (Freddie Mac), which both currently provide a 40-year loan modification option.
The final rule adopts HUD's April 1, 2022, proposed rule without change, the agency said. The new rule will takes effect May 8, 2023.
MBA President and CEO Bob Broeksmit said the change will provide borrowers with additional tools.
“Adding the 40-year loan modification to FHA’s loss-mitigation toolkit creates better alignment across the government and with Fannie Mae and Freddie Mac, a long-standing MBA priority that we most recently recommended in our new white paper on the future of loss mitigation,” Broeksmit said. “Better alignment will improve consumer experience and lead to consistency and simplicity when addressing adverse market conditions, national emergencies, and natural disasters.”
In its initial filing, which received 20 public comments, the FHA said, “Allowing mortgagees to provide a 40-year loan modification would support HUD's mission of fostering homeownership by assisting more borrowers with retaining their homes after a default episode while mitigating losses to FHA's Mutual Mortgage Insurance (MMI) Fund.”
The FHA added the move would allow for more sustainable monthly payments.
"Commenters said that current adverse market conditions increase the importance of creating additional tools to help struggling borrowers. Commenters said that many borrowers are currently in some form of delinquency," the FHA said in its final ruling, published Wednesday in the Federal Register.
The FHA has no expectations that owners will use the full term of the modifications. It said in its filing, “FHA data indicates that the average life of a 30-year FHA-insured mortgage is approximately seven years, although it is possible that prepayment behavior could be different with a longer-term loan.”
Research by MarketRate.com shows a borrower would pay over $114,000 more in interest on a 40-year mortgage on a $326,000 loan. Monthly payments, though, would drop from $1,687 to $1,504.
