FHA Adds 40-Year Loan Modification with Partial Claim to COVID-19 Recovery Loss Mitigation Options

The Federal Housing Administration last week published Mortgagee Letter 2022-07, Update to the COVID-19 Recovery Loss Mitigation Options, which adds to FHA’s COVID-19 Recovery Loss Mitigation Options, a loan modification with a 40-year term used together with a partial claim.

The Mortgagee Letter enables mortgagees to provide a 40-year loan modification with a partial claim option to assist homeowners who are behind on their mortgage payments for FHA Title II forward mortgages. The policy is designed to help homeowners reach the targeted 25 percent reduction on the monthly principal and interest portion on their mortgage payment when other COVID-19 Recovery Loss Mitigation Options are unable to do so.

HUD Principal Deputy Assistant Secretary for Housing and the Federal Housing Administration Lopa P. Kolluri said through the 40-year loan modification with a partial claim, more homeowners can retain their homes and avoid foreclosure.

“Over the last year we have made substantive changes to our COVID-19 recovery options that are showing strong results in helping homeowners with FHA-insured mortgages recover from the devastating financial effects of the pandemic,” Kolluri said. “Adding a 40-year modification with partial claim to our toolkit for servicers today reaffirms our long-term commitment to continue helping as many struggling homeowners as we can to keep their homes.”

Mortgage servicers may begin implementing the new 40-year modification with partial claim option immediately, but must begin offering this option to eligible borrowers with FHA-insured Title II forward mortgages, except those funded through Mortgage Revenue Bonds under certain circumstances, within 90 calendar days.

The policy does not affect effective dates for the COVID-19 Recovery Loss Mitigation Options announced in Mortgagee Letter 2021-18. Updates will be incorporated into a future version of the Single-Family Housing Policy Handbook 4000.1.

Earlier this month, FHA published a proposed rule in the Federal Register to solicit public comments on a proposal to allow servicers to provide a standalone 40-year loan modification option.  The public comment period closes on May 31.  When finalized, the rule will give FHA the ability to add a permanent 40-year term to its loss mitigation options.