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A big mortgage insurer is warning investors that federal modification programs could have a negative impact on its business. Federally regulated banks were instructed on how to report suspicious modification activity as six companies faced legal actions by two states. A Florida firm claims it is still seeing new business as competing modification firms are struggling to stay in business, and two more modification businesses have been launched.

The Obama administration’s loan modification plan could wind up costing mortgage insurer MGIC Investment Corp. more than if the loans hadn’t been modified, the mortgage insurer said in its earnings report today. It is still unclear what modification volume and subsequent performance will be, and MGIC said it is unable to accurately determine what benefit will be derived from the program.

The Milwaukee-based company also said that if pending cramdown legislation becomes law, it could still be responsible for the original balances if the modified loans default.

In a statement yesterday, the Federal Housing Finance Agency — which currently runs failed Fannie Mae and Freddie Mac — said it filed a Federal Register notice Monday indicating that it plans to allow loan modifications to be applied to the two secondary lenders’ housing goals. FHFA noted Fannie and Freddie would otherwise be unable to meet their housing goals given the current market turmoil.

“Restrictions on the availability of private mortgage insurance for borrowers with lower down payments, a surge in refinancing, particularly by higher income borrowers, the increasingly important role of FHA in the mortgage marketplace and a slowdown in the multifamily market, among other factors, mean fewer goals-qualifying loans in 2009,” FHFA Director James B. Lockhart said in the statement.

Public comment on FHFA’s plans is being accepted until around May 18.

In an April 27 announcement, Bank of America Corp. reported it has more than 6,400 home retention associates to handle loan modifications. The Charlotte-based institution modified 119,000 loans during the first quarter.

Global West Resources Inc. announced earlier this month that prominent members of Congress were receptive to its Housing Asset Recovery Plan when it met with them in Washington, D.C., last month. The proposed plan operates by either lowering the interest rate to 4.25 percent, reducing the principal or expanding the loan term based on the value of the loan if it were foreclosed.

Direct Capital Software is promoting loan modification software for modification businesses that tracks clients, calculates the modification terms and generates multiple available options. The $99 package includes modification forms and leads.

An April 23 bulletin from the Comptroller of the Currency to chief executive officers and compliance officers of all national banks requests that Suspicious Activity Reports filed in connection with loan modifications use the term “foreclosure rescue scam” within the narrative.

Pennsylvania’s Department of Banking issued cease-and-desist orders against Consumer Loan Modification of Arizona and U.S. Settlement Services of Florida on April 10, a news release last week said. In addition, a cease-and-desist order was issued on April 14 against Federal Loan Modification Law Center LLC of California.

The state alleges that the three modification firms advertise on their Web sites that they provide services in Pennsylvania even though they are not licensed to do so. The companies have until tomorrow to comply.

A fourth firm, Nationwide Foreclosure Prevention Center LLC of New Jersey, and owner Robert P. Valentin agreed in a consent agreement and order to stop doing business in Pennsylvania. A $2,000 fine was levied against Nationwide, which agreed to refund fees it collected from borrowers in the state. Valentin previously conducted unlicensed business under the name Justice Mortgage.

In Idaho. the state’s Department of Finance ordered National Foreclosure Relief Inc. to cease-and-desist from providing loan modification services in the state, the Better Business Bureau reported. The Nevada corporation was sued in February by the Federal Trade Commission over allegations it violated the Federal Trade Commission Act by misrepresenting its services to borrowers.

Idaho’s actions were sparked by a couple who complained to the state that they had paid $1,875 in upfront fees to National — which subsequently debited their checking account three times for $1,200 each. Instead of paying the couple’s mortgage payments as promised, the company pocketed the cash and the house was foreclosed.

“Many of these unlicensed mortgage modification companies turn out to be scam artists preying on the vulnerability of Idahoans desperate to keep their home,” Department of Finance Director Gavin Gee said in the statement.

The Associated Press reported that Idaho’s attorney general has filed a lawsuit last week against Apply 2 Save Inc. in Kootenai County District Court. The state is trying to shut down the Coeur d’Alene company over allegations that it violated state consumer protection laws.

West Palm Beach, Fla.-based Loan Solutions claimed in an April 28 announcement that it has “quickly developed a reputation for being honest, trustworthy and effective when working with its clients.” Its own referral business has continued — with 1,000 customer inquiries so far this year — as “competitors struggle to stay in business.”

The 40-employee firm claims some of its competitors charge outrageous fees, avoid in-person contact and take advantage of desperate borrowers. Some have inadequate experience, and others fail to deliver the services they promise. But its own practices involve a high “level of transparency.”

Philadelphia-based Fiscal Salvation is jumping into the modification racket though a partnership with The Mortgage Modification Consultants, according to a press release last week.

Seth Cohen capitalized on the attention he attracted from helping a couple, whose home was featured on Extreme Makeover, to modify their loan and avoid foreclosure by launching MortgageAidUSA LLC. An April 22 news release said the Troy, Mich.-based firm will initially assist borrowers in Michigan, Connecticut, Indiana, Ohio and Pennsylvania.

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