Obama Mortgage Plan Lacks Safe Harbor Against Investor Suits
05 March 2009 - 10:14AM
Dow Jones News
The success of the Obama administration's plan to cut mortgage
payments for millions of at-risk homeowners hinges on congressional
action to shield mortgage servicers against lawsuits from
investors, a top mortgage industry official said.
The plan, which the administration kicked off Wednesday, is
heavy on incentives for mortgage servicers and borrowers, but
provides no protection for servicers against lawsuits from mortgage
investors who might become angry about the modifications.
Roughly 60% of seriously delinquent U.S. mortgage loans are
concentrated in "private label" mortgage-backed securities, or MBS,
which are not issued by Fannie Mae (FNM) and Freddie Mac (FRE).
Such mortgages "probably won't be modified until there's a safe
harbor," David G. Kittle, the chairman of the Mortgage Bankers
Association, said. "The incentives are not enough to protect anyone
from a lawsuit."
Under the program, the government would pay mortgage servicers a
$1,000 one-time fee to reduce borrowers' mortgage payments to 38%
of their income for five years. The government would then match the
cost of further interest rate reductions or other measures intended
to bring mortgage payments down to 31% of borrowers' income.
The government would make generous annual payments to servicers
and borrowers if the loan stays current. The only incentive for
mortgage investors is a $1,500 payment for modifying loans that are
not yet delinquent.
The program does nothing to address what has been one of the
biggest impediments to loan modifications during the housing crisis
- the misalignment of the interests of mortgage servicers and
mortgage investors in private-label securities.
Companies servicing pools of mortgages packaged as private-label
securities are bound by contracts with investors in the securities.
The contracts vary, but typically require servicers to act in the
best interest of the investors. That is often not a simple
calculation. For example, a loss modification action by a servicer
could potentially benefit some investors of the pool at the expense
of others.
Mortgage investors have mounted lawsuits against servicers who
have performed loan modifications they deemed against their
interest.
Under the administration's program, participating mortgage
servicers are required to "use reasonable efforts" to waive the
contracts where they bar modification. However, the program does
not override the contracts.
The administration, which estimates its program could help as
many as 3-4 million people obtain more affordable mortgage
payments, supports legislation pending in the U.S. House that would
give mortgage servicers a safe harbor against investor lawsuits.
"We would expect the legislation process to continue," a senior
White House official told reporters during a background briefing
Wednesday.
Some housing experts said the program is likely to reach its
targets despite the lack of a safe harbor because the payments to
servicers are so generous they will tip the scales in favor of
modifying a loan.
"They need the servicers to cooperate. They've sweetened the pot
enough that that's going to happen to a large degree," National
Community Reinvestment Coalition President John Taylor said. He
called the lawsuit issue an "exaggerated problem."
Thomas Lawler, a housing economist from Leesburg, Va., said the
incentives would spur mortgage servicers to modify loans by giving
them the funds to staff up. Servicers haven't been aggressive
"because they haven't been adequately staffed and they haven't been
incentivized to do so" in a tanking housing market, he argued.
A feature of the program that would institute a "net present
value" test could also help spur more loan modifications by giving
mortgage servicers some cover from investors, Taylor said.
Participating servicers must run all loans that are at least 60
days delinquent or deemed at risk of imminent default through the
test. They are required to modify loans where the net present value
of the cash flows under a modification scenario exceed the net
present value of the cash flows in the absence of modification.
The mortgage industry offered praise for the plan. Officials
have exhorted borrowers to be patient with lenders as they cope
with an expected deluge of modification requests.
"The plan appropriately balances the interest of homeowners,
mortgage servicers and investors," Jamie Dimon, chief executive of
JPMorgan Chase & Co. (JPM), one of the largest servicers, said
in a statement.
- Jessica Holzer, Dow Jones Newswires; 202-862-9228;
jessica.holzer@dowjones.com