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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
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