Increased Forty-Year Term for Loan Modifications, 14252-14259 [2023-04284]

Agencies

• DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

[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 [www.gpo.gov]
[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 [email protected]. 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: https://www.fcc.gov/consumers/guides/telecommunications-relay-service-trs.

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 Regulations.gov
    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 https://www.regulations.gov 
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: https://www.fcc.gov/consumers/guides/telecommunications-relay-service-trs.

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 https://www.regulations.gov. 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