The Department of Housing and Urban Development (HUD) is seeking expanded loss mitigation authority allowing the principal amount of an Federal Housing Administration (FHA)-insured mortgage to be reduced by up to 30% to help homeowners avoid defaults.

The FHA would pay a partial claim to the servicer/investor to cover the writedown and make the mortgage current. Eventually, though, the borrower would have to repay the forgiven principal — but without interest.

"It would save FHA money," said William Apgar, a senior advisor to the HUD secretary. He noted that such an aggressive approach is "consistent" with President Obama's loan modification plan.

"We do believe FHA should have state-of-the-art modification tools," Apgar told National Mortgage News.

Meanwhile, FHA's "serious" delinquency rate is creeping up. FHA loans 90 days or more past due, in foreclosure and in bankruptcy hit 7.46% in February, compared to 6.16% a year ago.

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