FHA Updates Its COVID-19 Recovery Loss Mitigation Options to Include a 40-year Loan Modification

On April 18, 2022, FHA published Mortgagee Letter (ML) 2022-07, adding the option for a loan modification with a 40-year term that must be used together with a partial claim.  The ML may be implemented immediately but must be implemented no later than 90 calendar days from the publication date of the ML. The ML follows FHA’s publication of a proposed rule on April 1, 2022, that would enable mortgagees to provide a standalone 40-year loan modification option. Unlike the proposed rule however, the ML applies only to FHA’s COVID-19 Recovery Loss Mitigation Options. WBK reported on FHA’s proposed rule here.

                                   
One of the primary goals of FHA’s COVID-19 Recovery Options is to reduce the principal and interest portion of a homeowner’s mortgage payment by 25 percent for homeowners who cannot resume their existing payment. To arrive at that targeted 25 percent reduction, homeowners have several COVID-19 recovery home retention options that fall into one of the following three categories:

• COVID-19 Recovery Standalone Partial Claim;
• COVID-19 Recovery Modification; and
• COVID-19 Recovery Non-Occupant Loan Modification.

For homeowners who do not meet the requirements for a Standalone Partial Claim, the mortgagee must review the homeowner for a Recovery Modification. First, the mortgagee must determine the maximum Partial Claim amount available for the modification, and then calculate the arrearages. Homeowners would then be presented with the option for a modified 30-year mortgage that includes a partial claim if such funds are available, or, if the target payment is still not achieved, to apply partial claim funds as a principal deferment with a modified 30-year mortgage. In the event that both options are insufficient to achieve the targeted payment, ML 2022-07 now enables mortgagees to provide versions of those options that instead allow for a 40-year loan modification with a partial claim. The options that must be offered homeowners under the COVID-19 Recovery Modification category, and the order in which they must be offered, now consists of the following:

• calculate partial claim availability;
• calculate arrearages;
• modify the Rate and Term to a 30-year mortgage;
• apply partial claims funds as a principal deferment with a 30-year modified mortgage;
• modify the Rate and Term to a 40-year mortgage;
• apply partial claim funds as a principal deferment with a 40-year modified mortgage; and finally,
• if the target payment is still not achieved, offer the lowest monthly principal and interest payment achieved under the COVID-19 Recovery Modification.

Note that unlike the 30-year mortgage modification, the modification of the rate and term to a 40-year mortgage must be combined with a partial claim.