FHA Hopes to Reach More Defaulted Borrowers with Loan Modifications

The Federal Housing Administration is streamlining its loss mitigation program, allowing more defaulted borrowers to qualify for loan modifications and stay in their homes.

The agency issued a mortgagee letter late Tuesday eliminating many restrictions that blocked servicers from using the FHA-HAMP loan modification program to assist troubled borrowers with government-backed loans.   

“Not only are we taking steps to make sure more borrowers can benefit from FHA loss mitigation assistance, but we are also targeting our assistance to provide more sustainable payments for borrowers so that they are successful in retaining their homes over the long term,” said FHA commissioner Carol Galante. 

She also noted that these changes will reduce foreclosures and losses to the FHA mortgage insurance. (The fund is currently in the red on an accounting basis and may need assistance from the U.S. Treasury.)

Mortgagee Letter (2012-22) opens the door for servicers to place FHA borrowers who have been in arrears for 12 months into loan modifications. The changes eliminate a maximum 55% back end debt-to-income ratio requirement.

The 11-page mortgagee letter also outlines other changes in FHA loss mitigation policies that servicers must implement within the next 90 days.

FHA ended fiscal year 2012 with 739,000 single-family loans that are 90 days or more past due, a 16% jump from FY 2011.  This translates into a 9.58% serious delinquency rate as of Sept. 30 on its $1.1 trillion insured loan portfolio.

Surprisingly, loss mitigation efforts fell during the year.  The September report shows that FHA servicers completed 84,200 loan modifications in FY 2012, down from 145,000 in FY 2011.