No, FHA Won’t Be Offering 40 Year Loans

Ginnie Mae sent out a press release last week could create
some confusion for those readers who only skimmed the lede. The opening
paragraph states that the agency is creating a new pool of mortgages for
securitization on the secondary market. The pool, to be known as Pool Type
C-ET, will contain loans with terms up to 40 years while the current set of
pool types only supports loans with 30 year or shorter terms. It is easy to
miss that this special pool is not a new offering for borrowers but is limited
to loans that have gone through a loan modification.

It is probable that this pool is being created in
anticipation of the number of FHA, VA, and USDA loans that will be coming out
of pandemic-related forbearance plans. The latest survey by the Mortgage
Bankers Association estimated that 5.13 percent of homeowners with those loans were
still in the program as of June 20. Black Knight’s weekly survey estimates the
raw number at over 800,000. Many of these borrowers have either entered or will
soon enter he last three months of eligibility which is currently capped at 18
months, and most will have significant past due balances.

Borrowers who leave the program are offered several
options for paying back their arrearages including several types of loan
modifications. Among them is a re-amortization of the loan to spread the amount
over the remaining life of the loan, but in many cases this could result in an
unaffordable monthly payment.

The new pool type is expected to be available by October, at about the time
the 18 month terms begin to expire. It will be a “Custom” pool with a minimum
size of one loan and a $25,000 minimum balance. There will be no upper limit on
the loan amount as long as the eligible collateral meets the participating
agency’s requirements. That collateral will be participating agency modified
loans with original terms of 361 months or more, capped at 480 months. All modifications
of an included mortgage loan after its origination must have been occasioned by
default or reasonably foreseeable default.

“It’s important that Ginnie Mae issuers have secondary market liquidity for
options that our agency partners determine are appropriate for supporting
homeowners in distress,” said Michael Drayne, Ginnie Mae’s Acting Executive
Vice President. “Because an extended term up to 40 years can be a powerful tool
in reducing monthly payment obligations with the goal of home retention, we have
begun work to make this security product available.”

Drayne noted that the terms and extent of use of the included loans would
ultimately be determined by the FHA, HUD’s Office of Public and Indian Housing,
VA, and USDA’ Rural Development Program. Their loans are the basis for the Ginnie
Mae pools.

“Ginnie Mae has been integral to the interagency actions to prevent
foreclosure for homeowners experiencing financial hardship as a result of
COVID-19,” said Alanna McCargo, HUD Senior Advisor to Secretary Marcia Fudge.
“The challenges of the last year require meaningful solutions to help keep
people in their homes, which has been a priority for Secretary Fudge. As
interest rates rise, this 40-year feature will enable more payment reduction
options to help homeowners.”