HUD Mortgagee Letter Discusses Changes to Loss Mitigation Program

MBA (8/22/2008 ) Sorohan, Mike
HUD issued a Mortgagee Letter this week describing several changes to its Loss Mitigation Program that it said will strengthen both the Loan Modification and Partial Claim Initiatives.
“While these changes are designed to address borrowers who are facing serious defaults, most delinquencies can and should be resolved through early intervention,” wrote HUD Assistant Secretary Brian Montgomery in Mortgagee Letter 2008-21. “Mortgagees are reminded of the critical importance of early and constructive contact with delinquent borrowers and the requirement to notify borrowers of the availability of default counseling by HUD-approved counseling agencies.”

The Mortgagee Letter’s provisions became effective Aug. 14. They include the following changes:

• With respect to Loan Modifications, mortgagees may use the Treasury 10-year constant maturity as a basis for establishing the maximum interest rate plus a 200 basis point margin for loan modifications.

• HUD now allows legal fees and foreclosure costs related to canceled foreclosure action to be incorporated into either the Loan Modification or the Partial Claim subject to the following requirements:

o Loan Modifications/Legal fees and related foreclosure costs may now be capitalized into the modified principal balance.
o Partial Claims/Mortgagees may now include legal fees and foreclosure costs related to a canceled foreclosure in the Partial Claim.
o Late fees should not be capitalized in a Modification or included in a Partial Claim and should be waived.
o Only foreclosure costs for work actually completed can be included.
o Legal fees cannot exceed HUD maximums.

• When establishing a loan modification, it is acceptable for the mortgagees to include all payments due including an additional month in the loan modification to allow the borrower time before making the first payment.

HUD said all such foreclosure costs must reflect work actually completed to the date of the foreclosure cancellation and the attorney fees should not be in excess of the fee schedule that HUD has identified as customary and reasonable for FHA claim reimbursement.

The Mortgagee Letter can be found at http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/08-21ml.doc.