On September 23, 2009, the US Department of Housing and Urban Development (“HUD”) announced changes in the way that they will compensate lenders (“loss mitigation incentives”) who participate in loan modifications for borrowers with FHA loans. These changes are scheduled to take effect October 23, 2009. Details about these changes can be reviewed at the HUD website: http://www.hud.gov/utilities/intercept.cfm?/offices/adm/hudclips/letters/mortgagee/files/09-35ml.doc
Background
The recent economic slow-down has increased demand for loss mitigation actions, including but not limited to, loan modifications. Recent industry studies of these loan modifications revealed that borrowers who experienced an increased mortgage payment on a modified loan had a significantly higher re-default rate than borrowers whose loan modification provided a lower payment.
The Federal Housing Administration (“FHA”) reviewed its recent insured loan modifications and found that, generally, they resulted in higher payments to the borrower. The higher payment was the result of not lowering the interest rate to the current market rate and/or not extending the term of the loan to the maximum thirty years as authorized. Generally, the loan modifications simply capitalized the past due amounts and allowable charges and did not extend the term of the loan, resulting in a higher monthly payment (principal, interest and mortgage insurance) to the borrower.
This has led FHA to update its term and interest rate requirements for loan modifications to provide for a reduction in the mortgage payment whenever possible and help more mortgagors avoid re-default (and potential foreclosure). Lenders who do not meet FHA’s requirements will not be considered valid for loss mitigation incentive payments.
Interest Rate and Term Requirements
- The loan modification note rate must be reduced to no more than ½ percent over the current Market Rate (see definition below).
- The lender must re-amortize the total unpaid amount due over a 30-year period.
Example (once the updated requirements are in effect)
The mortgage lender approves an FHA Loan Modification that is executed by the Borrower. Before the modification, the note rate was 7 percent and there were 312 payments left <last payment to be made in December 2035>. The current Market Rate is 5.04 percent. Per the updated FHA requirements, the fixed note rate on the modified loan may not exceed 5.50 percent. Also, the modified mortgage must be re-amortized so that the entire unpaid amount is payable over a 360 month (i.e., 30 years) from the due date of the first monthly payment for the modified loan (i.e., through 2039). This should result in a monthly payment for the Borrower that is less than the monthly payment before the loan modification was executed.
Here is the HUD Definition of “Current Market Rate”: Most recent Freddie Mac Weekly Primary Mortgage Market Survey Rate for 30-year fixed-rate conforming mortgages (US average) rounded to the nearest one-eighth of one percent (0.125%). The weekly survey results are published on the Freddie Mac website at http://www.freddiemac.com/pmms/ and the Federal Reserve Board includes the average 30-year survey rate in the list of Selected Interest Rates that it publishes weekly in its Statistical H.15 at http://www.federalreserve.gov/releases/h15/.
For more information, you can email Lane County Home Savers, LLC at: SaveMyHome@LaneCountyHomeSavers.com, or call us at our direct, local number: 541-302-4840
