If bankruptcy judges begin to reduce or "cram down" the principal amount of residential mortgages, Federal Housing Administration servicers would have to absorb the losses because the government cannot pay a claim on a cramdown, according to the Mortgage Bankers Association.Passage of the bankruptcy bill (H.R. 3609) to permits cramdowns and loan modifications would make it riskier for lenders to originate FHA-insured and Department of Veterans Affairs-guaranteed loans, MBA chairman-elect David Kittle warned a House Judiciary Committee panel. As a result, lenders would have to charge higher interest rates and fees. The MBA also noted that Fannie Mae and Freddie Mac would be required to purchase loans out of mortgage-backed securities pools if loans are modified. "If this bill becomes law, we believe mortgage rates would jump significantly, going up 1 1/2 to 2 points for everyone taking out a loan," Mr. Kittle told the commercial and administration law subcommittee. The association can be found on the Web at http://www.mortgagebankers.org.

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