Despite reluctance from much of the housing-finance industry, House lawmakers are set to mark up legislation next week that would remove legal liability for loan servicers that restructure mortgages on their own in an attempt to help at-risk borrowers.
The bill, sponsored by Rep. Michael Castle, R-Del., is designed to provide incentives for servicers to make modifications to a mortgage — such as changing the interest rate, principal or length of terms — to avoid foreclosure. Castle and others argued during a House Financial Services Capital Markets Subcommittee hearing Tuesday that servicers are reluctant to modify such loans because the threat of litigation from major investors who own a portion of the mortgage.
The full committee is expected to mark up the bill next Wednesday as an estimated 2 million borrowers are likely to face higher interest rates over the next two years when their adjustable-rate mortgages reset.
“A safe harbor should embolden servicers to ramp up loan modifications. Without the fear of litigation, servicer efforts toward loss mitigation should also greatly increase,” said Capital Markets Subcommittee Chairman Paul Kanjorski, D-Pa. The Castle measure will be part of an overall housing-stimulus package that will be on the floor by the end of the month.
But the industry has put up some resistance. The American Securitization Forum, which represents much of the industry from issuers to investors, opposes the Castle bill, arguing it is unnecessary because loan servicers already have a duty in their contracts to engage in loss mitigation with at-risk borrowers.
It also contends the bill would set a bad precedent by changing the terms of a contract.
The Mortgage Bankers Association has not taken a stance on the bill, but said it could scare away investors, drying up liquidity in an already tight market.
But such arguments faced a tough sell Tuesday, with Republicans joining Democrats by arguing the industry has not done enough despite a voluntary plan that has helped 1.2 million borrowers modify loans or enter new payment plans.
Critics complain the industry-backed effort is only reaching about a third of at-risk homeowners, and many of those workouts have not provided enough breathing room for borrowers.
Rep. Ginny Brown-Waite, R-Fla., told industry representatives of a constituent who was unable to modify a mortgage even after offering to pay off half of the delinquent bill. “They want everything or nothing. This is someone who had previous loans and never, ever was foreclosed on,” Brown-Waite said.
Rep. Brad Sherman, D-Calif., questioned how the Castle bill could discourage future investment in mortgage-backed securities since it attempts to clarify the rights of servicers who act to benefit the overall pool of investors.
“I’m not saying that it would deter future investment in mortgage pools,” said Ralph Daloisio of the American Securitization Forum. “It runs the risk of deterring future investment in mortgage pools.”
Sherman countered that a greater disincentive would be for Congress to do nothing. “Allow my friends, the lawyers, to sue on behalf on each of the investor groups with regard to each of the different contracts. I assure you there will be more investment in law school and less investment in mortgage pools as the years go forward,” Sherman said.
This article appears in the April 19, 2008, edition of NJ Daily.