FHA Directs Servicers to Lower Loan Rates When Modifying

FHA is giving its servicers a directive to lower mortgage rates on loan modifications after finding too many borrowers ended up with higher payments. In the past, FHA allowed servicers to increase the interest rate when it was appropriate. But now that interest rates have come down, "FHA is not really happy with what they are seeing," said Bob Lyons, a servicing consultant with Lyons and McCloskey in Fairfax Station, Va. A new mortgagee letter (2009-35) directs FHA servicers to reduce the interest rate on newly modified loans to a rate that is not more than 50 basis points above the Freddie Mac Weekly Primary Mortgage Survey rate. The FHA mortgagee letter also directs servicers to extend the term of the new mortgage so the borrower has 30 years to pay it off. To qualify for incentive payments, "the modified loan must meet the term and interest rate requirements prescribed in this mortgagee letter," according to the letter signed by FHA commissioner David Stevens.