|A hearing held by a House committee last week focused on servicer liability in loan modifications and investor liability in assignments.
The hearing, “Accelerating Loan Modifications, Improving Foreclosure Prevention and Enhancing Enforcement,” held by the House Committee on Financial Services Thursday, addressed liability imposed by one amendment on purchasers or assignees of mortgage loans arising from the recently-passed House bill H.R. 3915, the Mortgage Reform and Anti-Predatory Lending Act. Also at issue was another amendment that calls for a safe harbor from legal liability for servicers who implement qualified loan modifications or workout plans.
House Committee on Financial Services Chairman Rep. Barney Frank noted the hearing was called prior to the Bush Administration’s announcement Thursday about a five year freeze on teaser rates for some subprime borrowers.
Testimony from the Center for Responsible Lending indicated the legislation “fails to hold Wall Street accountable for supporting abusive lending by buying — or even worse, by soliciting — dangerous loans,” according to a copy of written testimony by the group’s president. He testified that both proposed amendments fail to solve the problems they are intended to address and added that the language in the assignee amendment appears to define eligibility for this fund in a way that “would mean few if any people were eligible.”
The center instead wants bankruptcy judges to be empowered to modify mortgages.
Federal Deposit Insurance Corp. Chairman Sheila Bair’s testimony focused on an estimated 1.4 million subprime borrowers with hybrid adjustable-rate mortgages who are current now but likely to become delinquent after rate resets next year and in 2009. She has recommended a five year freeze at the starter rate for this group.
Bair also clarified that few hybrid borrowers actually remain in the pools after reset and pay the full contract rate, thus it is not likely restructuring will deny investors a large stream of interest payments on loans resetting to the full contract rate. She also noted modified loans will prevent, not delay, delinquency.
The FDIC chairman highlighted H.R. 3915 can only impact future loan originations while the modification amendment, as drafted, would appear to override existing contracts and could create a Constitutional issue. She warned that any legislation should consider the duty servicers have to all affected investors and not slow ongoing modification practices or create more risk of litigation.
In regard to the assignee amendment, Bair deferred to regulators of institutions who are more extensively involved in acting as assignees or securitizers because the FDIC and other federal banking agencies are already able to bring enforcement actions for violations of assigning or securitizing loans a borrower cannot repay, and the FDIC does not anticipate many of its institutions currently engage as assignees or securitizers.
The American Securitization Forum testified servicers are confronting a formidable loss mitigation challenge, given the volume and deteriorating credit performance of subprime originations in 2005 and 2006 that are approaching their initial reset, according to a prepared statement by the forum’s executive director, George Miller. As a result, servicers have redoubled their efforts, with most reaching out to hybrid ARM borrowers well in advance of reset to identify potential payment problems before they occur.
Bush’s plan for a five-year freeze was based on framework provided by ASF, which noted that its recent efforts include developing a framework which servicers can apply on a more systematic and streamlined basis to evaluate loan affordability, borrower capacity and willingness to repay, among other factors to determine the appropriate loss mitigation action.
ASF also echoed concerns over H.R. 4178, or the Emergency Mortgage Loan Modification Act of 2007, which can interfere with previously established, private contractual obligations.
Pool servicing agreements “typically require that the actions of the servicer, among other requirements, not be materially adverse to the interests of the certificate holders,” ASF said. “Changing this standard would alter the commercial expectations of investors and could undermine the confidence of investors in the sanctity of agreements which are central to the process of securitization, and would discourage investment in markets that need liquidity — both now and over the longer term.”
Although the legislation should be carefully crafted to avoid the perception that it is a revision of existing contracts, “an acknowledgement that a prudent servicer may rely on reasonable analytic tools and presumptions … could be an effective and necessary tool to reach” the goal of providing assistance to borrowers who are otherwise at risk of default and foreclosure, said ASF, a member of the HOPE Now Alliance.
Faith Schwartz, executive director of HOPE NOW, highlighted that members agreed to a Statement of Principles on Nov. 13 that recommends calls to hybrid ARM borrowers four months ahead of rate resets to warn them of higher payment and assess their continued ability to pay. The principles also established a single port of entry for all participating counselors and the making available of dedicated e-mail and fax connections to support counselor and consumer contacts by January 2008.
Schwartz said 300,000 postal letters were sent on Nov. 30 to delinquent borrowers, while another round of letters is scheduled for Dec. 19. A telephone hotline established by the group has been utilized nearly 150,000 times by over 67,000 borrowers this year through Nov. 30.
She said the alliance has developed a three-point plan to accelerate loan modifications for borrowers who will not qualify for refinancing but have good payment records and are likely to benefit from a fast-track loan modification to freeze their rate for five years.
Schwartz said the modification amendment should only be used as a last resort so investors can maintain confidence in “the dispute resolution system into which the parties believed they had subjected interpretations of their agreement.”
North Carolina Deputy Commissioner of Banks Mark E. Pearce, who spoke on behalf of the Conference of State Bank Supervisors, said recent research showed that, on loans that went delinquent within a few months after the rate reset, even the issuer with the highest percentage modified only approximately one-third of the loans needing modification. Fear of investor lawsuits has created a reluctance to offer a loan modification without a full and detailed financial assessment of the individual borrower’s current financial condition. Adding personnel, increasing outreach, and other “energetic efforts of servicers have not translated into meaningful success in preventing large numbers of foreclosure,” he said.
He agreed the five-year freeze will be a big help for some, but more efforts are necessary to promote long-term affordable solutions to prevent foreclosures, such as reducing paperwork necessary to consummate a loan modification and passing any legislation Congress deems necessary to protect servicers from investor lawsuits. While not against the modification amendment, Pearce warned that servicers’ concerns over litigation could be eased if Congress ensures the bill does not violate contracts and the Constitution.
“Any legislative immunity, however, should be limited strictly to investor lawsuits,” he added.
The State Foreclosure Prevention Working Group, a joint effort of state attorneys general, state bank regulators, and the Conference of State Bank Supervisors, has found in meetings with the top 20 subprime servicers that there is a need for data on the extent and type of modifications actually being offered, and on progress in preventing foreclosures. Information about servicers’ practices and procedures is necessary to develop industry-wide best practices, and a consistent approach to modifications, Pearce said.
In an attempt to collect such information, the Working Group has developed and sent out a “call report” to servicers and expects to receive responses with the next couple weeks, Pearce said. The Consolidated State Report for Mortgage Servicers asks servicers for data on their total loans serviced; characteristics of these loans; the number and amounts of prime, subprime and Alt-A loans that will reset and when; the past-due and default rates on each of these categories; and what steps have been taken to prevent foreclosures.
“Collecting this information will give us a better understanding of the scope of the problem and the current state of loss mitigation efforts by the servicers,” Pearce said. “It should allow both regulators and the industry to track our progress and to move past anecdotal stories of success or failure.”
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