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SEC Gives Green Light for Loan Mods

The Securities and Exchange Commission has given servicers of mortgage-backed securities the green light to restructure or modify subprime loans that are headed for default.

The SEC opinion addresses an accounting issue that might have prevented servicers from being proactive in contacting subprime borrowers who are facing resets on their adjustable rate mortgages.

"This is good news," said Alison Utermohlen of the Mortgage Bankers Association, because servicers won't have to worry about any "adverse accounting consequences."

With rising subprime defaults and foreclosure, many lenders and servicers want to reach out to borrowers before they get behind on their payments

But industry groups, along with the federal banking regulators and accounting firms, were concerned such actions might trigger a Financial Accounting Standard 140 requirement and force the lender to repurchase the loan from the securitized pool.

The major stakeholders, including SEC, met June 22 with the Financial Accounting Standard Board to discuss these issues in a closed-door meeting. Separately, House Finance Services Committee chairman Barney Frank, D-Mass., asked SEC for its opinion on the FAS 140 issue.

In a letter to Rep. Frank, SEC chairman Christopher Cox noted that the central question discussed at the June 22 meeting was whether the ability to modify a loan when default is "reasonably foreseeable" would preclude off-balance treatment under FAS 140.

SEC professional staff believes "such loan modifications would not result in a requirement for entities to account for those securitized assets on their balance sheets," the SEC chairman says in the July 24 letter.

Mr. Cox also noted that SEC's view reflects the general consensus of the participants at the FASB meeting.

Rep. Frank thanked the SEC chairman for such a quick response to this issue. "This is a constructive approach that will allow mortgage lenders to provide help at the earliest possible moments to people who might otherwise would be trapped in bad loans or forced into foreclosure," the committee chairman said. (c) 2007 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.bondbuyer.com/ http://www.sourcemedia.com/

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