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HUD Publishes Proposed Rule for 40-Year Loan Modification

On April 1, 2022, the Department of Housing and Urban Development (“HUD”) published a proposed rule in the Federal Register seeking comments on a proposal to extend the maximum modification loan term limit from 360 to 480  months.

Currently, under 24 CFR 203.616, a Federal Housing Administration (“FHA”) loan can be modified “for the purpose of changing the amortization provisions by recasting the total unpaid amount due for a term not exceeding 360 months from the date of the modification.”  The proposed rule seeks to amend this loss mitigation option by extending the maximum modification loan term to 480 months.

The proposed rule states that the change would help mortgagees facing default by lowering monthly principal and interest payments by a meaningful amount, leading to a higher rate of home retention.  HUD acknowledges that the longer term would mean slower equity accumulation and additional  interest payments but concludes that the benefits of avoiding foreclosure outweigh these concerns.  HUD also points out that most mortgagees do not carry an FHA loan for the full term.  The average life of a 30 -year FHA-insurance mortgage is approximately seven years.

The proposed rule emphasizes that the amendment would provide FHA borrowers with a home retention option comparable to the 480-month options already allowed by Fannie Mae, Freddie Mac, the National Credit Union Association, and the U.S. Department of Agriculture.   

Comments will be accepted until May 31, 2022 and can be submitted either by mail or electronically through the Federal eRulemaking Portal.  Comments must reference Docket No. FR-6263-P-01 and the title of the notice, Increased Forty-Year Term for Loan Modifications.