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This would amend the current regulation at 24 CFR 203.616 to permit the modification of an FHA-insured mortgage for a maximum term not to exceed 480 months, or 40 years. The current regulation allows a mortgagee to modify a loan to cure a default by recasting the total unpaid amount due and other eligible costs for a term not exceeding 360 months, or 30 years. Increasing the term length of a modified loan would provide borrowers with a deeper reduction to their monthly mortgage payments as the outstanding principal would be spread over a longer time frame. This change would provide more FHA borrowers with the ability to retain their homes after default, including borrowers who have exhausted their partial claim allocation, as well as provide more affordable housing payments. This change would also align FHA with modifications available to borrowers with mortgages backed by Fannie Mae or Freddie Mac, which currently provide a 40-year loan modification option.

Statement of Need:

HUD anticipates that this would allow mortgagees greater ability to assist defaulted borrowers, including mortgagees affected by the COVID-19 pandemic, with avoiding foreclosure. It is vital that borrowers receive any loss mitigation options at HUD’s disposal and for which they are eligible to avoid foreclosure whenever possible and to mitigate the impact of a loss of job or other financial strains such as those resulting from the COVID-19 pandemic.

Additionally, given the large number of FHA-insured mortgages that have been originated or refinanced in the past few years in a historically low interest rate environment, simply extending out the term of a mortgage in default for another 30 years at a similar interest rate would not provide a substantial reduction to a borrower’s monthly mortgage payment. Therefore, providing this option for relief for all borrowers and originators is prudent for all FHA-insured mortgages.

Summary of the Legal Basis:

Executive Order 14002, Economic Relief Related to the COVID-19 Pandemic (Jan. 22, 2021), directs federal agencies to promptly identify actions they can take within existing authorities to address the current economic crisis resulting from the [COVID 19] pandemic. In response to this Executive Order and in support of the goal of achieving broad economic recovery following the COVID-19 pandemic, HUD has established expanded COVID-19 Loss Mitigation Options to address the impacts many Americans are experiencing in recovering financially from the long-lasting effects of the pandemic.

Alternatives:

HUD has considered other loss mitigation options which would allow borrowers to avoid foreclosure in response to the COVID-19 pandemic. HUD has made many of these options available through mortgagee letter. HUD does not view these options as alternatives, as different circumstances may call for different forms of loss mitigation. Additionally, HUD finds that this new option should not be limited only in response to the COVID-19 pandemic, but should be available in all circumstances where it could help individuals keep their homes.

Anticipated Costs and Benefits:

Executive Order 12866, as amended, requires the agency to provide its best estimate of the combined aggregate costs and benefits of all regulations included in the agency's Regulatory Plan that will be pursued in FY 2021. HUD expects that neither the total economic costs nor the total efficiency gains will exceed $100 million. This proposed rule would increase available loss mitigation options for borrowers and enable more borrowers to avoid foreclosure and remain in their homes. HUD also anticipates that this would have a positive effect on the FHA Mutual Mortgage Insurance Fund by lowering defaults.

Risks:

Although the impact of introducing a 40-year loan modification option for borrowers on the MMI Fund will needed to be modeled, HUD anticipates a favorable impact through reduced utilization of other, more costly loss mitigation options and foreclosure prevention.

Additionally, HUD anticipates that the effect on FHA-insured mortgagors will be minor. HUD recognizes that a 40-year mortgage would cost the borrower in the form of great interest paid over time and slower equity building. However, HUD notes that the average life of an FHA-insured mortgage is approximately seven years, and HUD anticipates that a borrower would similarly refinance a 40-year mortgage Any additional interest and slowed equity build that a borrower might pay with a 40-year modified loan compared to a 30-year modified loan, especially when looked at over the life of an average FHA-insured mortgage, would not impose a significant burden to borrowers and would be outweighed by the benefits to a borrower of being able to retain their home.