Servicers Fear MBS Lawsuits
Fear and doubt seems to be impeding mass restructurings of problem mortgages as servicers are wary of being sued by investors holding mortgage-backed securities.
The Bush administration, federal regulators, mortgage industry leaders and consumer advocates are encouraging servicers to develop loan modification programs to stem rising foreclosures due to risky adjustable-rate mortgages.
Subprime defaults and foreclosures are already at record highs and many are concerned that a wave of resets on two million subprime ARMs over the next 18 months could really create a crisis.
"We have a huge problem on our hands. We can't just sit doing this kind of case-by-case, laborious restructuring with all these millions of subprime hybrid ARMs," FDIC chairman Sheila Bair said.
So far, it appears the portfolio lenders are taking the lead in modifying ARMs before they reset at a higher interest rate.
Some portfolio lenders are extending the existing interest rate for a full seven years from the original start date of a 2/28 or 3/28 ARM, according to MRG Document Technologies group chairman Terry King.
But servicers are aware that some investors in private-label MBS oppose the implementation of streamline loan modification programs.
"We are aware of securities holders that have begun scrutinizing the actions of servicers and the way the servicers actions have allegedly improperly hurt the interests of the securities holders by insufficient adherence to the [servicing contract's] restrictions on modifications and related actions," the Consumer Mortgage Coalition says in an Oct. 6 letter to the FDIC chairman.
CMC members include some of the nation's largest mortgage lenders and servicers.
The Federal Deposit Insurance Corp. chairman has been at the forefront of regulators urging servicers to be proactive and to work with ARM borrowers before they become delinquent.
Ms. Bair noted recently that some institutions are taking a proactive approach but more needs to be done and quickly.
"Frankly, I'm frustrated that the servicing restructuring has not reached the level that I had hoped it would," she said.
In the trenches, the issue of loan modifications is still being "hotly debated" among servicers of subprime MBS, according to Louis Pizante, chief executive of Mavent Inc., a mortgage technology company in Irvine, Calif.
He noted servicers are suspicious of a recently issued statement by the Securities and Exchange Commission giving servicers the green light to modify loans when default is "reasonably foreseeable."
Many are concerned that the approach of a reset date does not reach the threshold of their servicing contracts to initiate a modification.
"SEC says it does," Mr. Pizante said. "But there have been a number of times where the regulators have said one thing and the courts say something different." Mr. Pizante previously worked in structured finance at Greenwich Capital Markets.
CMC executive director Anne Canfield says in the letter to the FDIC chairman that servicers have developed ways to preserve homeownership for delinquent borrowers.
But she also points out that "global" remedies, such as forgoing interest rate increases on 2/28s and 3/27s would violate servicing contracts.
"We believe that the 'loan by loan' methods we use are appropriate and allow all the stakeholders - the borrower, the investor and the servicer - to reach the correct outcome," Ms. Canfield says.
Meanwhile, Congress is taking a keen interest in amending the bankruptcy code to provide a safety net for struggling homeowners that servicers can't help.
House Judiciary Committee members are working on legislation that would allow distressed homeowners to get their mortgage restructured by filing for Chapter 13 bankruptcy.
Currently, the mortgage on a borrower's primary residence cannot be restructured in bankruptcy, but a mortgage on a second home or investment property can be restructured.
The Mortgage Bankers Association and other lender groups oppose the bankruptcy bill (H.R. 3906) sponsored by Reps. Linda Sanchez, D-Calif., and Brad Miller, D-N.C, that would allow judges to waive prepayment penalties, reduce the principal amount of the mortgage and lower the interest rate, if necessary.
Rep. Sanchez chairs a House Judiciary subcommittee that recently approved the bankruptcy bill by a party-line 5-4 vote. Democrats are working with Republican members to get bipartisan support before a full committee markup.
A consumer advocacy group, the Center for Responsible Lending, claims the bill will facilitate voluntary restructurings once bankruptcy judges break the ice and start to restructure mortgages. "The change will remove the fear that servicers have of being sued by investors, as well as establish standards that servicers will adopt for sustainable loan modifications," CRL senior vice president Eric Stein testified on Sept. 25 before Rep. Sanchez's subcommittee.
In the other chamber, Sens. Dick Durbin, D-Ill., and Arlen Specter, R-Pa., have introduced separate bankruptcy bills and they are reportedly drafting a bipartisan compromise.
Sen. Specter's bill would allow bankruptcy judges to write down the principal amount of a mortgage when the lender and borrower agree. But Sen. Durbin objects to giving the lender this veto power. (c) 2007 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com/ http://www.sourcemedia.com/