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U. S. Department of Housing and Urban Development
Washington, D.C. 20410-8000

June 28, 1996
 
MORTGAGEE LETTER 96-32
 
MEMORANDUM FOR:  ALL APPROVED MORTGAGEES
 
ATTENTION: Single Family Servicing Managers
 
SUBJECT:  Loss Mitigation - Mortgage Modification
 
     This Mortgagee Letter is the second in a series which will
address FHA's Loss Mitigation tools.  (Mortgagee Letter 96-25,
Existing Alternatives to Foreclosure - Loss Mitigation, was
issued on May 8, 1996).
 
     Mortgage modification is a foreclosure alternative which is
intended to serve mortgagors who have suffered a financial
hardship, but who now have accessible income which, while not
sufficient to sustain the original loan and repay the arrearage,
is sufficient to support a modified mortgage.
 
     Mortgage modification for FHA-insured loans has not been
widely utilized because most FHA-insured mortgages are in
mortgage pools that back Ginnie Mae guaranteed mortgage-backed
securities, which restricts the circumstances under which the
mortgage may be removed from the mortgage pool and may be
repooled.  A mortgage must be 90 days or more past due to be
removed from the pool.  Previously, Ginnie Mae permitted a
modified mortgage to be repooled only if not more than 24 months
had elapsed from the date of the first installment under the
original mortgage.  As of the date of its All Participants
Memorandum 96-15, Pooling FHA Loans That Have Been Modified as a
Result of Loss Mitigation Efforts, Ginnie Mae is permitting loans
modified under the loss mitigation program to be repooled in
Ginnie Mae II pools even if more than 24 months have elapsed
since the date of the first installment due under the original
mortgage as long as not more than 24 months have elapsed since
the first installment was due under the modified mortgage.
 
     When a mortgage goes into default, HUD expects mortgagees to
offer formal or informal forbearance relief, where the mortgagee
reasonably believes that the mortgagor will be able to resume the
mortgage payments.  (See HUD Handbook 4330.1, REV-5,
Administration of Insured Home Mortgages, Chapter 8).  Once the
mortgagor has recovered from a financial hardship, the mortgagee
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must analyze the mortgagor's income to determine whether the
mortgagor will be able to resume the original mortgage payments
and repay the arrearage within a reasonable period of time.  If
the mortgagor is unable to do so, the mortgagee must analyze
whether the mortgagor qualifies for an FHA  streamline refinanced
mortgage. If the mortgagor does not qualify for a refinance, the
mortgagee must consider whether the mortgagor is eligible for
mortgage modification, as prescribed in  HUD Handbook 4330.1,
REV-5, Administration of Insured Home Mortgages, 3-2 for
modifying a mortgage.
 
NOTE:
 
(1)  HUD approval for a modified mortgage which cures a default
     is not required if the term of the modified mortgage does
     not exceed 10 years beyond the original maturity date.  The
     mortgagee must also ensure first-lien status of the mortgage
     which may require a subordination agreement from any junior
     lienholders, and/or an endorsement added to the mortgagee's
     title policy.
 
(2)  To be repooled in a Ginnie Mae pool, the mortgage must be
     modified to have a term not to exceed 360 months from the
     due date of the first installment required under the
     modification agreement.
 
     HUD welcomes policy changes introduced by Ginnie Mae that
will permit us to reach those borrowers which could not be
assisted efficiently in the past.  Concurrent with this Mortgagee
Letter, Ginnie Mae is issuing an All Participants Memorandum
which provides specific information with respect to repooling of
the modified mortgages.
 
     If you have questions regarding modification of FHA-insured
mortgages, contact your local HUD Field Office.
 
Sincerely yours,
 

Nicolas P. Retsinas
Assistant Secretary for Housing-
Federal Housing Commissioner