August 14, 2008

**MORTGAGEE LETTER 2008-21**

**TO: ALL APPROVED MORTGAGEES**

**ATTENTION: Single Family Servicing Managers**

**SUBJECT: FHA Loss Mitigation Program Updates**

The Federal Housing Administration (FHA) is pleased to announce several
changes to its Loss Mitigation Program that 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. 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.

**[Loss Mitigation Program Changes]{.underline}**

This Mortgagee Letter announces three changes to the existing Loss
Mitigation program designed to give mortgagees additional latitude to
help borrowers cure defaults and retain homeownership. The changes noted
below are effective immediately.

First, with respect to Loan Modifications, mortgagees may use the
Treasury 10-year constant maturity as a basis for establishing the
maximum interest rate for loan modifications. The maximum interest
allowable should be calculated as 200 basis points above the monthly
average yield on United States Treasury Securities, adjusted to a
constant maturity of 10 years. Mortgagees shall refer to the rate that
is in effect as of the date of execution of the loan modification. For
information on the 10-year monthly constant maturities, please refer to
the statistical release H.15, which is available on the following web
site: <http://www.federalreserve.gov/releases/h15/data.htm>

Next, where loss mitigation is being attempted after foreclosure has
been initiated, mortgage servicers and mortgagors have advised that
foreclosure related costs and legal fees are often impediments to
successful loss mitigation. Many mortgagors who are able to resume
making monthly mortgage payments frequently do not have sufficient funds
to reimburse the mortgagee the legal fees and foreclosure costs incurred
prior to qualifying for loss mitigation and therefore are denied
participation.

Effective with this Mortgagee Letter, the Department will begin allowing
legal fees and foreclosure costs related to a canceled foreclosure
action to be incorporated into either the Loan Modification or the
Partial Claim subject to the following requirements. This guidance
expands and supersedes, in relevant part, the guidance provided in Loan
Modifications section F (page 21) and Partial Claims section F (page 26)
of Mortgagee Letter 00-05.

For Loan Modifications, legal fees and related foreclosure costs may now
be **capitalized** into the modified principal balance. For Partial
Claims (PC), mortgagees may now include legal fees and foreclosure costs
related to a canceled foreclosure in the Partial Claim.

Mortgagees are reminded that 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.
Late fees should not be capitalized in a Modification or included in a
Partial Claim. As the goal in providing the mortgagor either a Loan
Modification or a Partial Claim is to bring the delinquent mortgage
current and give the mortgagor a new start, the mortgagee should waive
all accrued late fees.

Please refer to Mortgagee Letter 2005-30 (or any subsequent guidance
issued by FHA on reasonable and customary foreclosure costs) for the fee
schedule for legal fees that HUD has identified as customary and
reasonable for FHA claim reimbursement. Lenders should perform a
retroactive escrow analysis at the time of the loan modification to
ensure that the delinquent payments being capitalized reflect the actual
escrow requirements required for those months capitalized.

Finally, in response to the industry's request to provide adequate time
for the mortgagee to complete all required actions related to a loan
modification, the Department provides the following clarification. When
establishing a loan modification, it is acceptable for mortgagees to
include all payments due including an additional month in the loan
modification.

Consider the following example. The mortgagor is due for the January
2008 and all subsequent payments. The mortgagee completes its loss
mitigation evaluation on June 27, 2008. To allow adequate time to
complete the loan modification, obtain all required signatures and
provide adequate notice to the mortgagor of the new payment, the
mortgagee may include the payments due for July 2008 and August 2008 in
the loan modification. The mortgagor will begin remitting payments due
under the modified mortgage effective with the installment due September
1, 2008.

Any questions regarding this Mortgagee Letter or requirements for use of
the partial claim and loan modification authorities may be directed to
HUD\'s National Servicing Center (NSC) at 888-297-8685 or
hsg-lossmit@hud.gov.

> Sincerely,
>
> Brian D. Montgomery
>
> Assistant Secretary for Housing --
>
> Federal Housing Commissioner