SEC OKs Servicer Activism in Loan Restructuring

The Securities and Exchange Commission has ruled that servicers of mortgage-backed securities can take the lead in restructuring or modifying subprime loans that are headed for default without running into adverse accounting consequences.The agency's professional staff believe that "modifications undertaken when loan default is reasonably foreseeable should be consistent with the nature of modification activities undertaken that would be permitted if a default had occurred," SEC Chairman Christopher Cox says in a letter to House Finance Services Committee Chairman Barney Frank, D-Mass. The SEC letter also clarifies that such loan modifications would not trigger a Financial Accounting Standard 140 requirement and force the lender to repurchase the loan. Rep. Frank thanked the SEC chairman for such a quick response to the issue. "This is a constructive approach that will allow mortgage lenders to provide help at the earliest possible moment to people who might otherwise be trapped in bad loans or forced into foreclosure," the committee chairman said. A few months ago, the Mortgage Bankers Association circulated a position paper concluding that servicers have a lot of latitude in helping borrowers avoid foreclosure. MBA senior director Alison Utermohlen said the SEC letter is good news. "We thought we were on firm ground," she said.