The U.S. Department of Housing and Urban Development (HUD) recently issued a final rule extending the maximum term of an FHA loan modification from 30 to 40 years. The rule is effective May 8, 2023. HUD also issued Mortgagee Letter 2023-06 incorporating a 40-year standalone loan modification into FHA’s COVID-19 loss mitigation policies for situations in which partial claim funds are not available. (Prior to this change, FHA policies provided for a 40-year loan modification only in cases in which COVID-19 recovery partial claim funds are available.) The changes made by the Mortgagee Letter may be implemented immediately and must be implemented no later than May 8, 2023. Earlier this year, in Mortgagee Letter 2023-02 that was superseded by Mortgagee Letter 2023-03, HUD announced the temporary extension of COVID-19 loss mitigation options to all eligible FHA borrowers in default or facing imminent default, including non-occupant borrowers.
HUD advises in the preamble to the final rule that “[f]urther guidance about how [the change made by the rule] will be implemented inside of HUD’s loss mitigation program will be published in HUD policy.” HUD also addresses in the preamble the issue that the current interest rate environment may offset the usefulness of a 40-year loan modification:
“HUD recognizes that, since the proposed rule was published, interest rates have increased. An increase in interest rates may decrease the effectiveness of a modification in providing significant payment reduction, because the modified loan may be at a higher interest rate than the original loan. While rising interest rates may keep the 40-year loan modification from providing significant payment reduction, HUD believes that rising interest rates make the 40-year loan modification more critical in circumstances where the 30-year loan modification does not sufficiently decrease the monthly payment to an amount that the borrower could afford to retain their home. As a result, HUD believes that this rule will provide a critical home retention tool for borrowers as interest rates change over the long term.”