House Financial Services Chairman Frank served notice to investors in mortgage-backed securities Wednesday that they better start allowing at-risk loans to be refashioned or he will push through legislation that would remove legal liability for loan servicers that restructure them on their own.
Echoing frustration of many lawmakers and regulators, Frank said servicers have been hampered in restructuring many of the 2 million loans that are scheduled to set at higher interest rates within the next two years because of investors who feel they would be shortchanged under new terms.
He said that a Bush administration plan to encourage lenders to restructure at-risk loans has been ineffective because of the threat of investor lawsuits, and thus is readying a bill by Rep. Michael Castle, R-Del., that would prohibit the investor from suing the servicer if it acts in the best interest of the overall pool while modifying a loan.
“I do want to tell the American Securitization Forum and everybody else, if in fact, we are not able to get substantial progress in this kind of voluntary situation, then I can pretty much guarantee them that going forward they will face a very tough set of rules,” Frank said during a hearing on proposals to address turmoil in the housing market.
Frank’s remarks highlight how the House will craft a much broader bill than a Senate measure expected to pass today. The Senate bill would provide more than $4 billion to states to buy and rehabilitate vacant, foreclosed homes, as well as $13 billion in tax breaks.
House Democrats intend to add an $11 billion package of tax breaks more targeted to homeowners than industry tax cuts contained in the Senate measure, as well as a proposal to allow the Federal Housing Administration to refinance up to $300 billion in new mortgages for those on the verge of foreclosure.
Even with such additional help, Frank and others contend that many homeowners will fall through the cracks because investors who own a piece of a mortgage are unwilling to allow a restructuring.
Typically, most mortgages are bought in bulk and then sold in tranches on the secondary market, where mutual funds, hedge funds, pension funds and others purchase portions of the pool. Thus, one loan can have many owners, with a few objections killing a workout.
Frank’s staff has narrowed the Castle bill to pick up support, limiting it to workout plans initiated before 2011 and specifically to owner-occupied properties. It would have to remain in place for five years and the new loan could not result in additional points and fees.
The American Securitization Forum, which represents much of the industry from issuers to investors, continues to oppose the Castle bill. It argues it is unnecessary because loan servicers have a duty in their contracts to engage in loss mitigation with at-risk borrowers. It contends the bill would set a bad precedent by changing the terms of a contract.
“It’s a well-intentioned effort to provide some protection,” said George Miller, executive director of the forum. “We think this goes too far in a congressional override of contractual rights.”
But that argument has not swayed regulators such as FDIC Chairwoman Sheila Bair and Comptroller of Currency John Dugan, both of whom support the Castle effort.
“You can’t serve two or three masters. You’ve got to serve the whole pool at once. We think your legislation clarifies that point,” Dugan told Castle during the hearing.
Frank also said the investor community might want to work with him on the Castle bill, noting that Housing Subcommittee Chairwoman Maxine Waters, D-Calif., has sponsored a much stronger measure, which provides, among other things, for more disclosure and counseling services and would prohibit a servicer from making a workout contingent on a borrower waiving their legal rights.
“If the gentlewoman from California gets into mitigation, then people are really going to get mitigated in ways they don’t like. I do urge people to take this into account,” Frank said.
This article appears in the April 12, 2008, edition of NJ Daily.