Servicers Could be Forced to Repurchase Loans

In providing relief for subprime borrowers, servicers and trustees of mortgage-backed securities also have to deal with accounting rules that govern permissible activities in managing mortgage trusts or "qualified special purpose entities," as defined by the Financial Accounting Standards Board.

Servicers can be forced to repurchase loans in a trust if they fail to comply with FASB rules governing QSPEs (FAS 140).

The American Securitization Forum in loan modification guidance released last week at its annual meeting in New York said it backs the Mortgage Bankers Association's stance in regard to a proposed resolution to this issue.

On May 25, the MBA sent a position paper to FASB that concludes restructurings and loan workouts are permissible in cases where a loan is in default or default is reasonably foreseeable.

"The MBA believes restructurings of certain securitized residential mortgage loans that are widely anticipated to go into default will not cause qualified special purpose entities holding restructured loans to be disqualifying, thereby forcing the transferors to record a repurchase of the loans."

This interpretation allows servicers to be pro-active and anticipate a borrower is likely to default after a subprime ARM resets.

However, a servicer has to contact the borrower and confirm their circumstances.

"A decision to restructure would not be made until the borrower confirms they will be unable to make mortgage payments and they provide evidence to their assertion," the MBA paper says.

Shortly after receiving the MBA's paper, the FASB scheduled a closed-door meeting for June 22 to discuss the issue of restructurings with representatives from the banking agencies, Securities and Exchange Commission, the Internal Revenue Service, big four accounting firms and mortgage industry.

"I think the board is interested in gathering as much information on this issue as possible," said MBA senior director Alison Utermohlen. "I think that is a fair indication that they intend to respond in some form or fashion." (c) 2007 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com

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