Government Problem-Loan Principal-Reduction Guidelines to Change

Starting August 15, servicers can reduce the principal amount of a troubled Federal Housing Administration-insured mortgage by up to 30% so the homeowners' monthly payments are reduced to 31% of income. "Tens of thousands of FHA borrowers will now be able to modify their mortgages," said HUD secretary Shaun Donovan. Under the new program, borrowers have to be 30-days delinquent to qualify and traditional FHA loss mitigation options would not be effective. "There is no net present value test for eligibility," the guidelines say. However, borrowers have to make timely payments during a three-month trial before the modification is finalized. Mortgage banking consultant Brian Chappelle said the new program should be able to help a high percentage of FHA troubled borrowers because their loans were not underwritten based on stated incomes or second mortgages to avoid paying mortgage insurance. Servicers will receive $1,250 incentive payments for completing these FHA modifications.