IRS Rule Aids Loan Mods

Servicers of residential mortgage-backed securities no longer have to wait for a borrower to miss a payment or even ask for help before they can offer the homeowner a loan modification, according to an Internal Revenue Service ruling.

The new IRS ruling encourages servicers to identify and assist borrowers that have a high risk of eventual foreclosure.

And it allows servicers to be proactive in preventing widespread foreclosures without jeopardizing the tax status of the Real Estate Mortgage Investment Corp.

"This is an important change that will allow more homeowners who may potentially get into trouble to have their loans modified prior to default," said Anne Canfield, executive director of the Consumer Mortgage Coalition.

In an example discussed in Revenue Procedure (2008-28), the servicer can elect to reduce the interest rate and principal on a loan for a borrower who has not responded to letters or phone calls and without the benefit of updated individual information.

The IRS recognizes that servicers have developed sophisticated programs to identify borrowers likely to default by using data such as high loan-to-value ratios, declining credit scores, falling house prices or approaching interest rate resets.

"Once the servicer forms a reasonable belief that there is significant risk of foreclosure, "then they can go ahead and contact the borrower before any payment goes late," IRS associate counsel Susan Baker told this newspaper. In December, the IRS issued a ruling to facilitate a Hope Now initiative for "fast-tracking" of subprime adjustable-rate borrowers into a refinancing or mod.

It allowed the servicers to quickly identify borrowers facing a reset and fast-track them into a modification where the starter rate is frozen for five years. (c) 2008 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com/ http://www.sourcemedia.com/

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