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FHA Adds Rate Flexibility to Retention Effort

To encourage more loan modifications, the Federal Housing Administration will allow servicers to increase the interest rate on the new loan so it can be sold at par and avoid a loss.

The Department of Housing and Urban Development set the maximum interest rate increase at 200 basis points above the 10-year Treasury rate, according to an Aug. 14 mortgagee letter.

Mortgage servicing consultant Bob Lyons noted it is difficult to sell or repool modified loans in today's market without taking a loss.

"They are trying to give them a little more latitude," he said, provided the borrower can afford the payments and it results in a performing loan. His firm, Lyons McCloskey, is based in Fairfax Station, Va. In a loan modification, FHA servicers generally reduce the interest rate and extend the term of the loan by up to 10 years.

HUD also is encouraging servicers to undertake loan modifications after the borrower has filed for foreclosure. The mortgagee letter says FHA servicers can add legal fees and other expenses related to a canceled foreclosure action to the principal amount of a modified loan.

"For loan modifications, legal fees and related foreclosure costs may now be capitalized into the modified principal balance," the mortgagee letter says. Legal fees and related foreclosure costs also can be included in partial claims. However, FHA expects the servicer to waive all accrued late fees, since the goal of a modification or partial claim is to give the homeowner a "new start."

At the same time, FHA opened the door for servicers to add one extra monthly payment into the loan modification to provide additional relief for the borrower and adequate time for the servicer to complete the loan workout.

"Overall, we thought the mortgagee letter was good for the borrowers and good for the servicers," Mr. Lyons said. (c) 2008 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com/ http://www.sourcemedia.com/