US Regulators Warn Mortgage Servicers On Loan Modifications
By Maya Jackson Randall, Of DOW JONES NEWSWIRES
WASHINGTON -(Dow Jones)- As mortgage servicers work to modify home loans for
struggling borrowers, they should not be influenced by the effect the
modification would have on a second mortgage, U.S. regulators made clear in a
joint statement Thursday.
"Any ownership interest in the subordinate lien cannot be a consideration,"
said the Federal Financial Institutions Council, an interagency group that
includes the Federal Reserve, the Federal Deposit Insurance Corp. and the Office
of the Comptroller of the Currency, among others.
The group added that mortgage servicers should restructure loans when it would
help owners and investors recover - regardless of potential effect on other
loans. Failure to do so may be a breach of the servicers' obligations, the
regulators said.
Regulators in 2007 encouraged banks and mortgage servicers to take steps to
prevent unnecessary foreclosures. With the housing crisis still raging,
officials Thursday expanded their statement to encourage firms to modify
residential mortgage loans regardless of whether the case involves a home equity
loan or some other second mortgage.
"A servicer's decision to modify the first lien mortgage should not be
influenced by the potential impact of the modification on the subordinate lien
loan and vice versa," the statement said.
The Obama administration in February announced an ambitious plan to help stem
foreclosures by offering substantial government payments to mortgage servicers
that make loans more affordable for struggling borrowers. Still, the Treasury
Department released data this week showing that performance among participating
servicers has been uneven, with only 9% of eligible borrowers receiving trial
modifications. With foreclosures mounting, lawmakers and housing groups are
calling on the administration to do more to address the housing crisis, saying
the program has failed to help as many people as expected.
The administration in April expanded its program to address second mortgages.
Under the expansion, the government pays servicers for successfully reworking
second mortgages such as home equity loans. At the time, the Treasury Department
said up to 50% of at-risk mortgages have second liens and many properties in
foreclosure have more than one lien.
The regulators' statement Thursday appears to be yet another attempt by the
federal government to encourage firms to boost efforts to stem foreclosures. The
regulators note that "entities servicing first and subordinate liens on the same
residential real estate property may be faced with potential conflicts of
interest when making loan modification decisions."
But failure to modify loans in cases that would produce a greater anticipated
recovery for owners and investors "may be a breach of the servicers' obligation
to those owners/investors," they warned.
-By Maya Jackson Randall, Dow Jones Newswires; 202-862-9255, maya.jackson-
randall@dowjones.com
(END) Dow Jones Newswires
08-06-091036ET
Copyright (c) 2009 Dow Jones & Company, Inc.
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