Millions of homeowners across the country are having difficulty affording their monthly mortgage payments because of the COVID-19 pandemic. The most vulnerable group of borrowers is concentrated within the Federal Housing Administration (FHA) program, with over 900,000 borrowers who are more than 90 days delinquent.

While the CARES Act provided homeowners with access to a mortgage forbearance and while subsequent FHA policy actions have extended these periods, forbearance is an inherently temporary solution. Ultimately, what will determine whether these homeowners are able to stay in their homes and continue to build wealth or whether they must sell their house or face foreclosure is the efficacy of the effort to place them into a post-forbearance solution that they can afford.

Given the stakes involved for FHA borrowers, their families’ futures, and the neighborhoods in which they live, FHA should continue to evaluate its post-forbearance options to determine whether further improvements would be beneficial. Research provides clear evidence that immediate and substantial payment reduction is the most effective mortgage default prevention tool available, so proposals to increase the number of borrowers who can access relief, and increase the relief provided, are worth considering.

This paper suggests several changes that FHA should consider to provide more borrowers with deeper payment reductions, many at no cost to the Mutual Mortgage Insurance Fund (MMIF), and to help mortgage servicers assist homeowners in navigating the available home retention options. These potential changes include:

  • Allow the term of modified mortgages to be extended to 480 months instead of 360, which would significantly increase the affordability of modifications to borrowers.
  • Make three key adjustments to FHA-HAMP:
    • Permit borrowers to receive the modification even if the waterfall steps cannot reach a payment-to-income (PTI) ratio of 40%;
    • Reduce the minimum PTI limit from 25% to 10% for modifications with a Partial Claim, which would allow more homeowners to receive a 20% payment reduction; and
    • Reduce or waive FHA monthly Mortgage Insurance Premiums (MIP) as the final waterfall step if necessary to permit homeowners to reach the target level of payment reduction.
  • Provide a single FHA streamlined modification in the COVID-19 home retention options that can offer borrowers substantial payment reduction with a minimum of delays.

These adjustments would provide borrowers in need of financial assistance with greater eligibility as well as more substantial payment reductions that help them retain their home and avoid foreclosure, as well as simplify the post-forbearance process for borrowers and mortgage servicers alike.