President

Box 2-5 — continuedinvestors. The servicer makes mortgage payments on behalf of theborrower, and retains a portion of the payment as its own revenue.A Pooling and Servicing Agreement (PSA) dictates the rules on loanmodifications between the lender, the investor, and the servicer.One challenge is that PSAs often have different terms, which maymake large-scale loan modifications more difficult for servicers toaccomplish. To solve this problem, there has been a recent movement toallow servicers more freedom to modify loans for distressed borrowers.In the summer of 2007, a private sector group representing servicers,lenders, and financial institutions issued guiding principles for thesecuritization and servicing industries. These principles are intended toincrease the uniformity of contracts across the Nation. Less variation incontracts allows servicers to develop uniform practices for dealing withrenegotiation, lowering the costs of modifying loans.The Administration launched a new program at the FHA called FHASecureas a targeted response aimed at keeping families in their homes. The FHA wascreated in 1934 to insure (but not originate) mortgages for qualified low- andmoderate-income borrowers, with less-than-perfect credit and little savingsfor a down payment. This insurance boosts home ownership by enablingborrowers who may have been priced out of the mortgage market to acquirehousing on more affordable terms. The FHA works through a network ofapproved lenders and guarantees that if the borrower defaults on the loan, theFHA will pay the lender the full outstanding balance of the loan. Unlike manysubprime lenders, most of the FHA’s risk is covered by charging mortgageinsurance premiums, not through significantly higher interest rates.FHASecure can help some creditworthy borrowers who are affected bysubprime interest rate resets to refinance their mortgages. The FHASecureprogram applies both to homeowners who are current on their mortgagepayments and borrowers who made timely mortgage payments before theirloans reset but are now in default. A borrower in default must also havesufficient income to make future mortgage payments under a fixed-rateFHA-insured loan, and a history of on-time mortgage payments before theircurrent loan reset. Making FHA mortgage refinancing options available tomore homeowners will help reduce the number of foreclosures and can helpbring greater stability to local housing markets.The President signed a bill to temporarily change the current Federal taxcode so that cancelled mortgage debt is not treated as taxable income. Underprior law, if the value of a home declines, and a portion of the debt on the70 | Economic Report of the President