Rule2023-04284
Increased Forty-Year Term for Loan Modifications
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
March 8, 2023
Effective
May 8, 2023
Issuing agencies
Housing and Urban Development Department
Abstract
HUD's regulations allow mortgagees to modify a Federal Housing Administration (FHA) insured mortgage by recasting the total unpaid loan for a term limited to 360 months to cure a borrower's default. This rule amends HUD's regulation to allow for mortgagees to recast the total unpaid loan for a new term limit of 480 months. Increasing the maximum term limit to 480 months will allow mortgagees to further reduce the borrower's monthly payment as the outstanding balance would be spread over a longer time frame, providing more borrowers with FHA- insured mortgages the ability to retain their homes after default. This change will also align FHA with modifications available to borrowers with mortgages backed by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), which both currently provide a 40-year loan modification option. This final rule adopts HUD's April 1, 2022, proposed rule without change.
Full Text
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<title>Federal Register, Volume 88 Issue 45 (Wednesday, March 8, 2023)</title>
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[Federal Register Volume 88, Number 45 (Wednesday, March 8, 2023)]
[Rules and Regulations]
[Pages 14252-14259]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-04284]
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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
24 CFR Part 203
[Docket No. FR-6263-F-02]
RIN 2502-AJ59
Increased Forty-Year Term for Loan Modifications
AGENCY: Office of Housing, HUD.
ACTION: Final rule.
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SUMMARY: HUD's regulations allow mortgagees to modify a Federal Housing
Administration (FHA) insured mortgage by recasting the total unpaid
loan for a term limited to 360 months to cure a borrower's default.
This rule amends HUD's regulation to allow for mortgagees to recast the
total unpaid loan for a new term limit of 480 months. Increasing the
maximum term limit to 480 months will allow mortgagees to further
reduce the borrower's monthly payment as the outstanding balance would
be spread over a longer time frame, providing more borrowers with FHA-
insured mortgages the ability to retain their homes after default. This
change will also align FHA with modifications available to borrowers
with mortgages backed by the Federal National Mortgage Association
(Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie
Mac), which both currently provide a 40-year loan modification option.
This final rule adopts HUD's April 1, 2022, proposed rule without
change.
DATES: Effective May 8, 2023.
FOR FURTHER INFORMATION CONTACT: Elissa Saunders, Director, Office of
Single Family Program Development, Office of Housing, Department of
Housing and Urban Development, 451 7th Street SW, Suite 9278,
Washington, DC 20410-4000; telephone number 202-708-2121 (this is not a
toll-free number); email <a href="/cdn-cgi/l/email-protection#3340555556565751525058735b46571d545c45"><span class="__cf_email__" data-cfemail="0d7e6b6b6868696f6c6e664d657869236a627b">[email protected]</span></a>. The telephone numbers
listed above are not toll-free numbers. HUD welcomes and is prepared to
receive calls from individuals who are deaf or hard of hearing, as well
as individuals with speech or communication disabilities. To learn more
about how to make an accessible telephone call, please visit: <a href="https://www.fcc.gov/consumers/guides/telecommunications-relay-service-trs">https://www.fcc.gov/consumers/guides/telecommunications-relay-service-trs</a>.
SUPPLEMENTARY INFORMATION:
I. Background
The Federal Housing Administration (FHA) was established by
Congress in 1934 to improve nationwide housing standards, to provide
employment and stimulate industry, to improve conditions with respect
to home mortgage financing, to prevent speculative excesses in new
mortgage investment, and to eliminate the necessity for costly second
mortgage financing.\1\ HUD's regulations for Title II FHA single family
forward mortgage insurance are codified in 24 CFR part 203. These
regulations address mortgagee eligibility requirements and underwriting
procedures, contract rights and obligations, and the mortgagee's
servicing obligations. These regulations also address a mortgagee's
obligations to offer loss mitigation options when a mortgagor defaults
on a loan, as provided in 24 CFR 203.501.
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\1\ 12 U.S.C. 1701 et seq.
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Over time, HUD has expanded and revised the regulations regarding
the loss mitigation options that mortgagees are required to consider
utilizing including special forbearance, recasting of mortgages,
partial claims, pre-foreclosure sales, deeds in lieu of foreclosure,
and assumptions as ways to mitigate losses to the Mutual Mortgage
Insurance Fund.\2\ In 1996, the Balanced Budget Downpayment Act, I
(Pub. L. 104-99, approved January 26, 1996) amended sections 204 and
230 of the National Housing Act to provide that HUD may pay insurance
benefits to a mortgagee to recompense the mortgagee for its actions to
provide an alternative to the foreclosure of a mortgage that is in
default. These actions may include special forbearance, loan
modification, and/or deeds in lieu of foreclosure, all upon terms and
conditions as the mortgagee shall determine in the mortgagee's sole
discretion, within guidelines provided by HUD.\3\ In response, HUD
promulgated an interim
[[Page 14253]]
final rule (61 FR 35014, July 3, 1996), followed by a final rule (62 FR
60124, November 6, 1997) adding loss mitigation options to 24 CFR part
203. One of these options allows mortgagees to modify a mortgage for
the purpose of changing the amortization provisions and recasting the
total unpaid amount due for a term not exceeding 360 months from the
date of the modification.\4\
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\2\ 24 CFR 203.501.
\3\ 12 U.S.C. 1715u.
\4\ 24 CFR 203.616.
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II. The Proposed Rule
On April 1, 2022, HUD published for public comment a proposed rule
to amend 24 CFR 203.616, which allows a mortgagee to modify a mortgage
for the purpose of changing the amortization provisions by recasting
the total unpaid amount due for a new term, by replacing the maximum of
360 months with a new maximum of 480 months.\5\ The proposed rule
sought to allow mortgagees to provide a 40-year loan modification to
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.
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\5\ 87 FR 19037.
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The proposed rule recognized that a lower monthly payment is key to
bringing the mortgage current, preventing imminent re-default, and
ultimately retaining their home and continuing to build wealth through
homeownership. The proposed rule also recognized that this option would
be particularly beneficial to borrowers impacted by the COVID-19
pandemic, including those who may re-default in the future after having
received a loss mitigation option under COVID-19 policies. Finally, the
proposed rule recognized that, while the 40-year mortgage remains rare,
it has become more commonly recognized in the mortgage industry,
including by the Government Sponsored Enterprises (GSEs), Fannie Mae
and Freddie Mac.
III. This Final Rule
In response to public comments as discussed further below, and in
further consideration of issues addressed at the proposed rule stage,
HUD is publishing this final rule without change from the proposed
rule.
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.
IV. Public Comments
HUD received twenty comments in response to the proposed rule. The
public comments are discussed in three categories: support for the
proposed rule, opposition to the proposed rule, and suggested revisions
and additions to the proposed rule.
A. Support for the Proposed Rule
The Proposed Rule Will Help Struggling Homeowners
Commenters stated that a 40-year loan modification option would be
a valuable tool, providing significant relief for struggling borrowers.
Commenters said that extended maximum loan terms allow lenders to
further reduce monthly mortgage payments, assisting borrowers in
retaining their homes and avoiding foreclosure. A commenter said
borrowers who re-default after utilizing other loss mitigation methods
(such as a partial claim) have few options for retaining their homes.
Commenters said that the current 30-year term maximum loan
modifications are sometimes insufficient to provide affordable monthly
payments for defaulting borrowers. A commenter said that 40-year loan
terms could reduce borrowers' need to file partial claims, reducing the
likelihood that borrowers will have an additional lien on their
property. This commenter also said that in some cases, extending the
terms of loan modifications may be the only option to prevent borrowers
in default from losing their homes.
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. A commenter said there has been a recent increase in the
number of foreclosures on FHA loans caused by the end of the
foreclosure moratorium. Commenters noted that the current rising
interest rate environment makes it more difficult for FHA lenders to
meet target payment levels with 30-year loan modifications because the
refinanced mortgage would be subject to a higher interest rate and
therefore higher monthly payments. A commenter said that this is
particularly true for borrowers who recently originated or refinanced
their loans at recent historically low interest rates.
HUD Response: HUD appreciates the support for this effort and
agrees with these commenters. These commenters identified many of the
reasons HUD is moving forward with this rule.
The Proposed Rule Will Help Individuals Build Wealth
Commenters said that 40-year loan modifications could help
borrowers build wealth through homeownership by keeping borrowers in
their homes. Commenters said that homeownership is a long-term means of
building wealth. A commenter said that borrowers' credit is greatly
harmed by foreclosure, often preventing foreclosed borrowers from
regaining homeownership in the future.
HUD Response: HUD agrees with these commenters. The longer term of
the modified loan will lead to lower monthly mortgage payments than a
30-year term modification, which will allow more borrowers to retain
their homes and all the benefits that accompany homeownership,
including long-term wealth building. Although a shorter term loan
allows for quicker wealth accumulation, the use of a 40-year loan
modification may be the single option allowing the borrower to retain
their home. Thus, the 40-year loan modification will allow these
borrowers to retain the wealth they have already accrued and allow them
to continue to build wealth, albeit at a slower pace, by retaining
their home--instead of losing their home.
The Proposed Rule Will Help Borrowers Harmed by the COVID-19 Pandemic
Commenters said that 40-year loan modifications could help
homeowners negatively affected by the COVID-19 pandemic. Commenters
said that the COVID-19 pandemic caused many homeowners to struggle with
their mortgage payments, particularly those who experienced pandemic-
related job loss or disruption. A commenter also said that 40-year loan
modifications could benefit borrowers who re-default after completing a
COVID-19 Loss Mitigation Recovery Option. Another commenter said that
the proposed rule would ameliorate negative impacts on struggling
homeowners in the post-pandemic environment.
HUD Response: HUD agrees with these commenters. The unprecedented
[[Page 14254]]
nature of the COVID-19 pandemic caused many borrowers to utilize a loss
mitigation option to bring their mortgage current after becoming
delinquent or utilizing a forbearance. As a result, many borrowers have
used much of their Partial Claim allotment or have received a loan
modification at historically low interest rates. If a borrower impacted
by COVID-19 who brought their mortgage current experiences a future
default episode, they will likely have fewer loss mitigation options
available. Therefore, a 40-year loan modification will be critical in
helping those borrowers achieve an affordable monthly mortgage payment
in the event of a future default episode or natural disaster.
The Proposed Rule Will Promote Financial Inclusion and Equity
A commenter said that 40-year loan modifications would promote
financial inclusion. Commenters said that 40-year loan modifications
would be particularly helpful for individuals with low and moderate
incomes, especially those living in regions with high home prices.
Commenters said that first-time homebuyers could benefit from 40-year
loan modifications, especially given the lack of entry level housing
and rising home sale prices. Commenters said that mortgagors who had
lost their jobs were more likely to need reductions in their monthly
payments. A commenter said that homeowners facing long-term hardships
would also benefit. Another commenter said the proposed rule would help
ordinary families and their communities. Another commenter described
the proposed rule as a win for everyone.
A commenter said that the proposed rule supports equity. This
commenter said that the proposed rule would positively impact American
Indians and Alaska Natives, who had higher levels of job loss during
the pandemic than other racial groups and who tend to be less
financially literate and experience higher foreclosure rates. Another
commenter said that 40-year loan modifications would benefit Black and
Hispanic borrowers who are more likely than White borrowers to be in
forbearance, need loss mitigation, or be delinquent on their loans.
A commenter said that the simplicity of a 40-year loan recast is
beneficial to borrowers who have lower financial literacy and who may
have less ability to evaluate risk and choose among financial courses
of action. This commenter said that negotiating with a bank's servicing
agent can be confusing or adversarial for borrowers. This commenter
also said that American Indians, Alaska Natives, and individuals who
are Black are more likely to benefit from simplified loss mitigation
policies because they may have lower financial literacy than other
racial groups.
HUD Response: HUD agrees that this rule, for all the reasons
identified by these commenters, will promote financial inclusion and
equity through sustained homeownership. It will provide a useful home
retention tool for borrowers including low-to-moderate income
borrowers, first-time homeowners, borrowers of color, and borrowers
from underserved neighborhoods and communities, particularly in a
rising interest rate environment.
According to internal data from HUD's Single Family Data Warehouse,
as of September 30, 2022, borrowers who identify as Black are in
default at much higher rates than other borrowers. Borrowers who
identify as Black make up 15.86 percent of FHA's total portfolio, but
22.46 percent of mortgages in default. The race and ethnicity of all
other borrowers in default, including Native Americans and Hispanics,
are roughly proportional to the racial and ethnic breakdown of the
total FHA portfolio. Therefore, the 40-year loan modification that will
help borrowers retain their homes by extending the term of their
mortgage to help reduce monthly mortgage payments will especially help
Black borrowers who are presently in default at disproportionate rates.
The Regulatory Impact Analysis (RIA) that accompanied the proposed
rule reviewed the impacts of the rule on equity and found: ``The loan
modification policy is intended to promote equity by preserving the
housing wealth of lower income households.'' The RIA reviewed studies
over whether there have been differences in loss mitigation by race or
ethnicity and noted that the findings vary. Ultimately, the RIA
concluded: ``Evidence supports that the 40-year term would be
implemented fairly to advance the economic interests of all protected
classes.''
The Proposed Rule Will Benefit the Housing Market
Commenters said that the foreclosure mitigation effects of 40-year
loan modifications would support the stability of the housing market,
allowing the housing market to thrive and benefiting the economy as a
whole. A commenter said that foreclosures harm the home values of
adjacent properties, increasing the likelihood of additional future
foreclosures in the area. This commenter said these vicious cycles of
home price deterioration can be pervasive in low-income neighborhoods.
HUD Response: HUD agrees that introducing the 40-year loan
modification will help reduce foreclosures and thereby reduce the
secondary effects of foreclosure, such as neighborhood blight. Given
the rising interest rate environment, the longer term of a loan
modification will be particularly critical in helping borrowers retain
their homes after a default episode. By helping reduce foreclosures,
this rule will help stabilize the housing market especially during a
period of potential economic instability. The RIA cited various studies
looking at the impact of foreclosures on the immediate housing market,
which found that property sales located within 300 feet of a foreclosed
property experience about a 1 percent discount per foreclosure and that
the absolute impact of neighboring foreclosures is greater for lower-
priced properties. When implemented as part of HUD's Single Family loss
mitigation program, this loss mitigation tool will help more borrowers
retain their homes and continue to build their communities.
The Proposed Rule Aligns FHA Loss Mitigation Policy With That of Other
Financial Institutions
Commenters said the proposed rule would align loss mitigation
policies between different regulators. Commenters said that the Federal
National Mortgage Association (Fannie Mae), the Federal Home Loan
Mortgage Corporation (Freddie Mac), the Government National Mortgage
Association (Ginnie Mae), the National Credit Union Association, the
U.S. Department of Agriculture, the Government-Sponsored Enterprise
(GSEs), the Federal Deposit Insurance Corporation, and the Office of
the Comptroller of the Currency already support various 40-year loan
modification programs. A commenter said that the effective use of 40-
year loan term modifications by Fannie Mae and Freddie Mac demonstrate
the merit of the proposed rule change.
Commenters said aligning loss mitigation policies between different
regulators is good public policy. A commenter said that aligning loss
mitigation policies is a long-standing industry priority. Another
commenter said that aligning loss mitigation policies creates
operational ease for mortgage servicers. Commenters said that allowing
40-year loan modifications would create parity among lenders by
providing borrowers who have FHA-insured mortgages with the same
[[Page 14255]]
options available to borrowers whose mortgages are backed by other
financial institutions. A commenter said that parity among all lenders
is necessary for the housing finance system.
Commenters said that standardizing loss mitigation policies would
make federal regulations more consistent, more predictable, and easier
to understand. A commenter said that consistent program terms help loan
servicers communicate and educate consumers on the available loss
mitigation options.
HUD Response: HUD agrees with these comments. Once implemented,
this rule will provide borrowers with the ability to extend the term of
their modified mortgage to 480 months, similar to what is offered by
other federal agencies and the GSEs. This will also ensure that
borrowers are not disadvantaged compared to non-FHA-insured mortgages.
The Proposed Rule Will Benefit the FHA Lending Program
Commenters said that 40-year loan modifications could help mitigate
losses to FHA's Mutual Mortgage Insurance (MMI) Fund. A commenter noted
that the MMI Fund reimburses FHA lenders' foreclosure losses,
transferring losses from FHA lenders to the MMI Fund. Another commenter
said mitigating losses to the MMI Fund would increase liquidity for FHA
lenders.
Commenters said that allowing 40-year term loan modifications for
FHA-insured loans would incentivize more credit unions to become FHA
lenders. A commenter said that the significant amount of staff
expertise and specialization necessary to become an FHA lender is a
barrier to credit unions providing FHA-insured loans. This commenter
also said that the proposed rule's alignment of FHA requirements with
other federal regulators' policies would significantly ease the burden
of achieving FHA eligibility and increase the participation of
community-based financial institutions in FHA programs. Another
commenter said that federal credit unions could offer 40-year loan
modifications if the proposed rule is adopted because the National
Credit Union Administration already authorizes federal credit unions to
make FHA-insured mortgages with terms of up to 40 years. This commenter
also said that state laws in Massachusetts, New Hampshire, and Delaware
would allow state-chartered credit unions to modify FHA-insured
mortgages to 40-year terms. Commenters said that having the option to
provide 40-year loan modifications for FHA-insured loans would allow
credit unions to better serve their members.
HUD Response: HUD agrees that the 40-year loan modification would
reduce risk of losses to the MMI Fund, thereby strengthening HUD's
ability to provide access to homeownership to low-to-moderate income
borrowers and first-time homeowners in accordance with HUD's overall
mission.
HUD values the work of credit unions and their service to
underserved borrowers. HUD is pleased that credit unions will be able
to provide 40-year loan modifications in line with HUD's requirements
as a loss mitigation option for borrowers.
The Proposed Rule Aligns With HUD's Mission Statement
Commenters said that the proposed 40-year term modifications are
commendable because they further HUD's mission of creating strong,
sustainable, inclusive communities and quality affordable homes for
all. A commenter said the proposed rule demonstrates that HUD is
proactively providing borrowers with additional support and helping
them keep their homes. Commenters also said that the lower-income,
struggling mortgagors who would most likely benefit from the proposed
rule are the types of borrowers the FHA was created to assist.
HUD Response: HUD appreciates the support from commenters and
continually reviews and evaluates options to assist borrowers while
safeguarding the MMI Fund.
The Benefits of the Proposed Rule Outweigh the Downsides of Extended
Loan Terms
Commenters said that the benefits of the proposed rule outweighed
the potential that 40-year loan terms would slow the equity building
process, increase borrowing costs, and increase the chances that a
homebuyer will go ``underwater'' when home values decline. A commenter
said that it is more important for defaulting borrowers to retain their
homes than to build equity quickly, especially if there is no other
option to prevent foreclosure. Another commenter said that as long as
the equity requirement is sufficient, there is no reason not to allow a
longer payback. A commenter said that the length of a 40-year loan was
less of a concern for young homebuyers, who could still pay the loan in
full by the time they retire. Another commenter said that, while 40-
year loans have downsides, they could allow struggling borrowers a
chance to pursue their dreams of homeownership.
HUD Response: HUD agrees with these commenters. There are potential
downsides to all loss mitigation options, which have to be weighed
against the benefits. For borrowers who would be eligible for a 40-year
loan modification, this option is intended to be the last tool utilized
to help borrowers retain their home.
B. Opposition to the Proposed Rule
The Proposed Rule Will Distort the Housing Market and Reduce
Affordability
A commenter said that home prices are governed by the monthly
payments made by mortgagors and that adding ten years of additional
payments for the same homes would cause prices to rise over time.
Another commenter said that the free market should regulate the housing
market and that the private sector would not provide the type of loans
HUD proposes because the higher interest rates would offset any
savings. A commenter said federal policies have already created too
much debt, endangering the banking system and society. Another
commenter said the proposed rule would only be keeping a housing bubble
propped up to boost tax revenue.
Commenters said that blocking foreclosures reduces the supply of
available houses and causes the remaining housing supply to be
overvalued. Commenters said that the proposed rule would only provide
temporary relief to borrowers in exchange for reducing the supply of
affordable housing. A commenter said the rule would be saving the less
prudent at the expense of the responsible. This commenter said that an
18-month forbearance was more than enough time for people to get back
on their feet and save.
HUD Response: HUD appreciates this feedback and recognizes the
complexity of this issue. The Department of Veterans Affairs (VA) and
the GSEs already offer a 40-year loan modification; therefore, by
taking this step, FHA is aligning with VA and the GSEs to provide FHA-
borrowers with a similar option. The high cost of housing across the
country is the result of multiple inter-related causes and 40-year loan
modifications offered by VA and the GSEs have not been shown to cause
higher housing prices. Moreover, rising interest rates may result in
the need for loan modification with a longer term to help borrowers
keep their homes. The 40-year loan modification, once implemented, will
further help stabilize neighborhoods and avoid neighborhood blight.
[[Page 14256]]
Regarding the comment that an 18-month forbearance was more than
enough time for people to get back on their feet and save; although
this was true for some borrowers, many other borrowers did seek loss
mitigation assistance after their forbearance to help bring their
mortgage current and to provide a more affordable monthly payment. HUD
does not anticipate that all borrowers in default would be given a 40-
year loan modification. For borrowers who can afford to bring their
mortgage current and make their monthly mortgage payments through a
different loss mitigation option, such as with a 30-year loan
modification, a 40-year loan modification would not be required.
Borrowers Are Better Off Without the Proposed 40-Year Term Loan
Modifications
Commenters said struggling borrowers would be better off losing
their homes and stabilizing their finances through other means. A
commenter said that defaulting borrowers would likely not end up making
their payments, even with the extended loan terms. Commenters suggested
that borrowers use bankruptcy to write off debts and start over with a
clean slate. A commenter said that, even if borrowers make their
payments, a 40-year term is so long that borrowers would become
permanently indebted.
HUD Response: HUD appreciates this feedback. However, based on
HUD's analysis of mortgage performance after loss mitigation and the
rising interest rate environment, the 40-year modification will assist
many borrowers in retaining their home through a more affordable
monthly mortgage payment. FHA's existing standard loss mitigation
options rely on a review of the borrower's income to determine
affordability. When the 40-year loan modification is incorporated into
FHA's standard loss mitigation policy, HUD will adjust the requirements
for this review to ensure that mortgagees' use of this tool is targeted
for where it will be most effective to respond to each borrower's
specific circumstances and to help borrowers avoid foreclosure.
HUD believes that, generally, borrowers who could avoid foreclosure
through loss mitigation would benefit much more from loss mitigation
than from declaring bankruptcy, which is a drastic measure with long-
lasting consequences. However, HUD notes that loss mitigation is
optional, and a borrower may choose to decline loss mitigation
assistance.
Additionally, borrowers would not be permanently locked into a 40-
year term. The average life of an FHA-insured mortgage is approximately
seven years. After time, borrowers generally either refinance or sell
their home. HUD anticipates that, in most cases, borrowers who take
advantage of the 40-year modification will not retain the mortgage for
the full 40-year term.
C. Suggested Revisions and Additions to the Proposed Rule
Forty-Year Loan Terms Should Be Available From Origination
Commenters suggested that HUD approve an option for the FHA to
insure 40-year term mortgages from origination. Commenters said that
40-year terms at origination could provide homebuyers with more
affordable monthly payments and more flexibility to find a mortgage
that fits their needs. A commenter said that many credit unions have
demonstrated that 40-year loan terms can enable borrowers to enter
loans with more affordable monthly payments. Commenters suggested that
allowing 40-year terms from loan origination would particularly benefit
young and lower-income homebuyers by providing access to longer
amortization. A commenter also said that offering 40-year terms at loan
origination could help close the racial homeownership gap.
A commenter said that allowing 40-year loan terms at origination
would not affect the stability of the housing finance system. This
commenter said that loans are less risky for lenders when borrowers
have affordable mortgage payments. This commenter also said that
borrowers who enter 40-year loans could later refinance for shorter
terms to reduce the total amount of interest paid and build equity
faster.
HUD Response: HUD appreciates these comments; however, HUD does not
have statutory authority to provide 40-year mortgages at origination
and is therefore not considering that option as part of this
rulemaking.
FHA Lenders Should Continue To Use 30-Year Terms for Loan Modifications
A commenter suggested that the existing loss mitigation structure
should not be eliminated and that 40-year loan modifications should not
replace 30-year modifications as the standard. This commenter said that
many borrowers can afford payments with a 30-year loan modification and
that these borrowers would build home equity more quickly and pay less
interest with a shorter loan term. Commenters suggested that FHA
lenders calculate loan terms flexibly to address each borrower's unique
circumstances. A commenter suggested that FHA lenders should evaluate
the array of possible modification terms to balance additional interest
costs and slower equity building with the need for immediate payment
relief. Another commenter suggested that HUD and the FHA should
narrowly tailor their guidance around 40-year loan modifications to
ensure that FHA lenders incrementally extend loan terms beyond 360
months only as necessary to achieve affordability and home retention
for borrowers.
HUD Response: HUD appreciates the feedback and agrees that the 40-
year loan modification should not replace the 30-year loan
modification, but that both should be used by mortgagees where they
would best assist the borrower in retaining their home and reducing
risks to FHA'S MMI Fund. Where HUD added a 40-year loan modification
with partial claim into the COVID-19 Recovery Modification, the 40-year
modification is only utilized when the 30-year modification cannot
achieve the target payment. Similarly, HUD will evaluate the most
appropriate use for the 40-year modification as it drafts its guidance
for utilization of 40-year modifications as part of FHA's standard loss
mitigation tools. HUD will also take these comments into consideration
as it drafts that guidance.
HUD Should Consider Additional Methods of Providing Payment Relief in
Conjunction With 40-Year Term Loan Modifications
A commenter supported the proposed rule but said that high interest
rates reduce the effectiveness of extended loan terms to lower monthly
payments. This commenter noted that the current COVID-19 waterfall
target is a 25 percent principal and interest (P&I) reduction and said
that a loan with a 4.50 percent note rate and twenty-six years
remaining would fail to reach a 25 percent P&I reduction with a 40-year
modification that uses the maximum amount of principal deferral. The
commenter further said that if interest rates continue to rise, the
ability of loan providers to achieve payment reduction goals through
40-year term loan modification will decrease.
This commenter said that current adverse market conditions such as
increasing interest rates and continued COVID-related hardship require
further steps to provide payment relief to struggling homeowners. This
commenter suggested that HUD should allow borrowers to access their
statutory maximum partial claims to achieve affordable payments. This
commenter noted that, currently, HUD does not allow borrowers to use
their full partial
[[Page 14257]]
claim to address COVID-19 hardship. The commenter suggested that the
additional partial claim capacity could be used to defer principal and
generate an additional 4 to 6 percentage points of payment reduction.
The commenter also suggested that HUD should combine extended term
modifications with a partial claim to help achieve affordable monthly
payments for borrowers who have a remaining partial claim amount.
Commenters also suggested that HUD should not increase and should
consider reducing or waiving annual mortgage insurance premiums (MIP)
for all loss mitigation programs. A commenter suggested that MIP
reductions could help provide affordable monthly payments for borrowers
if high interest rates prevented a 40-year term loan modification from
achieving payment reduction goals.
This commenter suggested that reducing the MIP for some borrowers
would not harm the MMI Fund. The commenter noted that reducing MIP will
cut revenue for the MMI Fund, but suggested that the further reductions
in monthly payments could prevent additional foreclosures, offsetting
the lost MIP revenue. This commenter also said that MIP reductions
could be targeted only to borrowers at the highest risk of foreclosure.
The commenter suggested that HUD work with industry stakeholders to
develop an efficient and feasible process for servicers to reduce the
MIP.
This commenter also suggested that HUD should set the maximum
interest rate for new 40-year modification terms at 25 basis points
above Freddie Mac's Primary Mortgage Market Survey (PMMS) and not the
current 50 basis points. The commenter said that adding 50 basis points
onto an already high PMMS rate would limit the payment relief HUD can
offer. The commenter said that a reduction of 25 basis points properly
balances the marketplace's needs with the needs of borrowers. This
commenter estimated that such a reduction would provide an additional 2
to 3 percentage points of payment relief.
HUD Response: HUD appreciates this feedback. HUD agrees that high
interest rates will reduce the ability of the extended loan term to
provide such significant payment relief. However, the 40-year
modification will still be effective in the higher interest rate
environment in helping borrowers achieve greater payment reduction than
they would achieve from a 30-year modification. This difference may
help borrowers retain their homes, who might not be able to do so with
a 30-year modification.
HUD continues to review all possible options and changes to
policies and procedures for mortgagees to assist borrowers in retaining
their homes and to be a responsible steward of the MMI Fund. This rule
does not preclude HUD from making additional changes or providing
additional options for mortgagees to use with struggling borrowers.
This rule enables HUD to exercise its statutory authority to allow for
the 40-year loan modification to be used in the future as one of FHA's
loss mitigation tools or in combination with others. Further guidance
about how this will be implemented inside of HUD's loss mitigation
program will be published in HUD policy.
Additional Government Programs Should Include 40-Year Term Loan
Modifications
A commenter suggested that 40-year terms should be available for
the Home Affordable Modification Program (FHA-HAMP) and Presidentially
Declared Major Disaster Areas (PDMDA) modification programs (either
with or without a partial claim) to achieve target payments. This
commenter recommended that FHA introduce a term of up to 40 years into
standard FHA-HAMP and PDMDA waterfalls outlined in the FHA Single
Family Housing Policy Handbook (Handbook 4000.1), Section III,
Servicing and Loss Mitigation, in a future policy update.
HUD Response: This rule enables HUD to exercise its statutory
authority to allow for the 40-year loan modification to be used as one
of FHA's loss mitigation tools or in combination with others. This rule
allows HUD to use this authority in FHA-HAMP and in modifications for
borrowers impacted by disasters. Further guidance about how this will
be implemented within HUD's loss mitigation program will be published
in HUD policy, and HUD will take these comments into consideration in
this context. This rule does not preclude HUD from making additional
changes or making additional options available for mortgagees to use
with struggling borrowers.
Ensure Secondary Market Liquidity
A commenter supported the proposed rule but said there might not be
sufficient liquidity to support 40-year loan modifications. This
commenter said that the ability to deliver a modification with an
extended term into a Ginnie Mae pool is a necessary condition for
servicer participation in a 40-year modification program. This
commenter also said that, although Ginnie Mae introduced a designated
security for extended term modifications in October 2021, there is
limited data and loan volume to demonstrate a deep and liquid
securitization market for these pools. This commenter suggested that
the FHA and Ginnie Mae should ensure secondary market certainty,
including multi-issuer pools for extended term modification, before
finalizing the proposed rule change.
HUD Response: Although Ginnie Mae previously did not have a
secondary market for longer term modifications, Ginnie Mae's pool for
modified mortgages that are over 360 months, up to and including 480
months, was established in October 2021 and is currently available for
future loan modifications. FHA waited for the creation of an
appropriate Ginnie Mae pool before proposing establishing 40-year
modifications to ensure that these modified mortgages will continue to
benefit from Ginnie Mae securitization. Ginnie Mae is closely
monitoring the pool and its sustainability. FHA and Ginnie Mae work
closely together to ensure the viability of their programs.
HUD Should Add Additional Materials to the Supporting and Related
Materials Document Posted on <a href="http://Regulations.gov">Regulations.gov</a>
A commenter suggested two additions for Table 6, Summary of
Economic Impacts posted in the Regulatory Impact Analysis (``RIA'')
prepared for the proposed rule. This commenter suggested adding ``No
tax liability on mortgage debt canceled as part of a loan
modification'' as a benefit to borrowers. This commenter said the lack
of tax liability resulted from the most recent extension of The
Mortgage Debt Relief Act of 2007 through December 31, 2025. This
commenter said that this addition would help ensure that Native
Americans who may have lower financial literacy know that a loan
modification will not result in a large additional tax bill.
Under the Equity Considerations section, this commenter suggested
adding ``Mitigation of disproportionate impact of COVID-19 pandemic on
Native American jobless rate and economic status.'' This commenter said
that this addition would demonstrate the proposed rule's positive
impact on equity by highlighting how it will reduce the odds that
Native Americans will suffer disproportionately from the effects of
COVID-19.
HUD Response: HUD appreciates the feedback but believes that these
suggested changes to the RIA would be outside the scope of the RIA.
While HUD agrees that the tax relief for debt forgiveness as part of
loss mitigation is a valuable tool in loss mitigation, this
[[Page 14258]]
rule does not itself involve principal reductions, debt forgiveness, or
cancellation of the mortgage debt. Modifying a loan to extend its term
is not debt cancellation and therefore cannot be added to the listed
benefits of the rule.
Regarding equity considerations, HUD agrees, as discussed in the
Equity Impacts section of the proposed rule's RIA, that American
Indians and Alaska Natives are among the underserved groups who will
disproportionately benefit from the rule. The Equity Considerations
column in Table 6 of the proposed rule's RIA presented a generalized
summary. The proposed rule is not limited to the COVID-19 pandemic--it
is intended to assist borrowers with FHA-insured mortgages who are
experiencing financial hardship due to negative life events or economic
conditions, whose existing mortgages are in default or imminent
default.
HUD Should Seek Additional Input From Industry Stakeholders
A commenter suggested that HUD further engage with industry
stakeholders to help determine how to integrate 40-year terms into the
permanent loss mitigation waterfall. Another commenter suggested that
the FHA should use the ``drafting table'' to solicit comments on the
FHA guidance that will implement the final rule.
HUD Response: HUD regularly considers feedback from the public and
stakeholders including industry partners and advocacy groups on changes
to policies and procedures, implementation, and additional concerns.
HUD looks forward to continuing to engage with stakeholders to ensure
that the best outcomes for borrowers can be achieved.
III. Findings and Certifications
Regulatory Review--Executive Orders 12866 and 13563
Pursuant to Executive Order 12866 (Regulatory Planning and Review),
a determination must be made whether a regulatory action is significant
and therefore, subject to review by the Office of Management and Budget
(OMB) in accordance with the requirements of the order. Executive Order
13563 (Improving Regulations and Regulatory Review) directs executive
agencies to analyze regulations that are ``outmoded, ineffective,
insufficient, or excessively burdensome, and to modify, streamline,
expand, or repeal them in accordance with what has been learned.''
Executive Order 13563 also directs that, where relevant, feasible, and
consistent with regulatory objectives, and to the extent permitted by
law, agencies are to identify and consider regulatory approaches that
reduce burdens and maintain flexibility and freedom of choice for the
public.
This rule was determined to be a ``significant regulatory action''
because it is likely to have an annual effect on the economy of $100
million or more. This rule will increase available loss mitigation
options for borrowers and enable more borrowers to avoid foreclosure
and remain in their homes. HUD also anticipates that this will have a
positive effect on the FHA MMI Fund by lowering defaults. The docket
file is available for public inspection on <a href="http://www.regulations.gov">http://www.regulations.gov</a>
and in the Regulations Division, Office of General Counsel, Department
of Housing and Urban Development, 451 7th Street SW, Room 10276,
Washington, DC 20410-0500. Due to security measures at the HUD
Headquarters building, please schedule an appointment to review the
docket file by calling the Regulations Division at 202-402-3055 (this
is not a toll-free number). HUD welcomes and is prepared to receive
calls from individuals who are deaf or hard of hearing, as well as
individuals with speech and communication disabilities. To learn more
about how to make an accessible telephone call, please visit: <a href="https://www.fcc.gov/consumers/guides/telecommunications-relay-service-trs">https://www.fcc.gov/consumers/guides/telecommunications-relay-service-trs</a>.
Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et seq.)
generally requires an agency to conduct a regulatory flexibility
analysis of any rule subject to notice and comment rulemaking
requirements, unless the agency certifies that the rule will not have a
significant economic impact on a substantial number of small entities.
The change of this rule will be limited to requiring mortgagees to
consider and, where appropriate, utilize an extended term limit.
Mortgagees are already required to consider mortgage modification so
this change should not have an economic impact on mortgagees. If there
is an economic effect on mortgagees, it would fall equally on all
mortgagees. Further, HUD anticipates that allowing an additional loss
mitigation tool will have a net positive economic impact on mortgagees
by decreasing the number of defaults and therefore the costs associated
with those defaults. Accordingly, the undersigned certifies that the
rule will not have a significant economic impact on a substantial
number of small entities.
Environmental Impact
A Finding of No Significant Impact (FONSI) with respect to the
environment has been made in accordance with HUD regulations at 24 CFR
part 50, which implement section 102(2)(C) of the National
Environmental Policy Act of 1969 (42 U.S.C. 4332(2)(C)). The FONSI is
available through the Federal eRulemaking Portal at <a href="http://www.regulations.gov">http://www.regulations.gov</a>. The FONSI is also available for public inspection
between the hours of 8 a.m. and 5 p.m. weekdays in the Regulations
Division, Office of General Counsel, Room 10276, Department of Housing
and Urban Development, 451 Seventh Street SW, Washington, DC 20410-
0500.
Executive Order 13132, Federalism
Executive Order 13132 (entitled ``Federalism'') prohibits an agency
from publishing any rule that has federalism implications if the rule
either: (i) imposes substantial direct compliance costs on state and
local governments and is not required by statute, or (ii) preempts
state law, unless the agency meets the consultation and funding
requirements of section 6 of the Executive Order. This proposed rule
does not have federalism implications and does not impose substantial
direct compliance costs on state and local governments or preempt state
law within the meaning of the Executive Order.
Unfunded Mandates Reform Act
Title II of the Unfunded Mandates Reform Act of 1995 (2 U.S.C.
1531-1538) (UMRA) establishes requirements for federal agencies to
assess the effects of their regulatory actions on state, local, and
tribal governments, and on the private sector. This rule does not
impose any federal mandates on any state, local, or tribal governments,
or on the private sector, within the meaning of the UMRA.
List of Subjects in 24 CFR Part 203
Hawaiian Natives, Home improvement, Indians-lands, Loan programs-
housing and community development, Mortgage insurance, Reporting and
recordkeeping requirements, and Solar energy.
For the reasons discussed in the preamble, HUD amends 24 CFR part
203 as follows:
PART 203--SINGLE FAMILY MORTGAGE INSURANCE
0
1. The authority for 24 CFR part 203 continues to read as follows:
[[Page 14259]]
Authority: 12 U.S.C. 1707, 1709, 1710, 1715b, 1715z-16, 1715u,
and 1715z-21; 15 U.S.C. 1639c; 42 U.S.C. 3535(d).
Sec. 203.616 [Amended]
0
2. In Sec. 203.616, remove the number ``360'' and add, in its place,
the number ``480''.
Julia R. Gordon,
Assistant Secretary for Housing--Federal Housing Commissioner.
[FR Doc. 2023-04284 Filed 3-7-23; 8:45 am]
BILLING CODE 4210-67-P
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</html>Indexed from Federal Register on March 8, 2023.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.