FHA Gives Servicers More Loan-Mod Latitude

To encourage more loan modifications, the Federal Housing Administration will allow servicers to increase the interest rate on the loan to reduce the investor's loss when it is sold or repooled. The FHA set the maximum interest rate increase at 200 basis points above the 10-year Treasury rate, according to FHA mortgagee letter 2008-21. Mortgage servicing consultant Bob Lyons noted that it is difficult to sell modified loans at par in today's market environment and that servicers have to consider that in deciding to do a loan modification. The FHA is "trying to give them a little more latitude," he said, provided the borrower can afford payments and it results in a performing loan. Mr. Lyons' firm, Lyons McCloskey, is based in Fairfax Station, Va. The FHA is also encouraging servicers to undertake loan modifications even after the borrower has filed for foreclosure. According to the mortgagee letter, servicers can add legal fees and other expenses related to a canceled foreclosure action into the principal amount of a modified loan.