Can a 40-year mortgage save failing borrowers?

New government program will support already delinquent FHA and VA borrowers.

By Jeff Lazerson | jlazerson@mortgagegrader.com | MortgageGrader.com | July 14, 2021

On the heels of the July 4 Independence Day weekend celebration, this fall we get to add a loan term extension up to 40 years for a category of failing borrowers. Yes, really.

Ginnie Mae, the principal financing arm for government mortgages from agencies like the Federal Housing Administration and Department of Veterans Affairs, issued a press release on June 25 announcing a 40-year mortgage securitization pool without any loan size limitations.

The unbelievable requirement for this mortgage extension is already modified mortgages “have been occasioned by default or reasonably foreseeable default.”

Mortgages in COVID-19 forbearance for example, may or may not have been modified.

Mortgages in mortgage servicer approved COVID-19 forbearance plans are not considered to be in the realm of default in any way, shape, or form. Currently, unmodified forbearance balances are typically lopped onto the back of the mortgage, becoming a balloon payment at the end of the 30-year loan term.

“The challenges of the last year require meaningful solutions to help keep people in their homes, which has been a priority for (U.S. Housing and Urban Development Secretary Marcia) Fudge,” said Alanna McCargo, senior advisor to Fudge. “As interest rates rise, this 40-year feature will enable more payment reduction options to help homeowners.”

Ginnie Mae’s big idea is to help homeowners in COVID-19 distress.

OK. But what are the underwriting rules going to be?

Does the new 40-year mortgage payment with the added lopped on balance have to be lower than the payment is now? Does the already failing borrower have to demonstrate the already modified loans were related to COVID-19? Does the borrower have to document, defend and explain what is going to be different this time around to prevent another round of payment defaults?

Perhaps it’s a way to prevent future foreclosures that can happen years from now when the 30-year modified mortgage balloon payment comes due. Or maybe it is a shameless foreclosure stall.

At a 3% interest rate, a $500,000 30-year fixed-rate mortgage has a principal and interest payment of $2,108.

Assuming 40 years at the same interest rate, the payment is $1,789, roughly an 18% payment decrease. Once you start lopping on previously unpaid mortgage payments, the stretched-out mortgage monthly payment savings quickly diminishes.

What investor in his or her right mind would want to buy mortgages in a proven pool of failed borrowers, likely with low equity at the same interest rate as the borrower currently is paying? FHA requires a 3.5% minimum down payment and VA backs loans with no down payment.

After all, tenant evictions have been pushed back another month to July 31 by the Center for Disease Control. And COVID-19 hardship borrowers with Fannie-Freddie owned mortgages are going to have access to lower interest rates and easier terms, according to a June 30 announcement by their conservator and regulator, the Federal Housing Finance Agency.

When I asked for details, a HUD spokesperson referred me back to Ginnie Mae. Ginnie Mae spokesperson Douglas Robinson said, “I can only tell you what is in our news release.”

U.S. Department of Veterans Affairs spokesman Gary Kunich said in part, “VA is aware of the change that Ginnie Mae has instituted. Once the moratorium on foreclosure and evictions for VA-backed loans ends, VA will provide appropriate guidance.”

The 40-year mortgage has been around in the conventional mortgage world for decades. Today, you can get a 40-year fixed-rate mortgage, even for jumbo loans, as low as 3.375% with an interest-only feature for the first 10 years. This is for purchases and refinancers, but not for modified mortgages in default mode.

Apart from COVID-19 forbearance, what is the point in harboring homeowners that for whatever reason have a demonstrated history of not making their house payments? If there is no repercussion for failure to pay, where does this end?

How fair is this to responsible, financially fit renters to trying to break into homeownership?

What are the lessons this provides for the future of homeownership? Does this send a message that you can keep your home with or without paying your mortgage?

Freddie Mac rate news: The 30-year fixed rate averaged 2.98%, 4 points lower than last week. The 15-year fixed rate averaged 2.26%, 8 basis points lower than last week.

The Mortgage Bankers Association reported a 6.9% decrease in mortgage application volume from the previous week.

Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $548,250 loan, last year’s payment was $26 more than this week’s payment of $2,306.

What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with 1-point cost: A 30-year FHA at 2.25%, a 15-year conventional at 1.99%, a 30-year conventional at 2.625%, a 15-year conventional high-balance ($548,251 to $822,375) at 2.125, a 30-year conventional high-balance at 2.75% and a 30-year fixed jumbo at 2.875%.

Eye-catcher loan of the week: A 15-year fixed at 2.37% without cost.

Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or jlazerson@mortgagegrader.com. His website is www.mortgagegrader.com.

* Specific loan program availability and requirements may vary. Please get in touch with your mortgage advisor for more information.