Investors deny hindering foreclosure relief
Posted: Thursday, November 13, 2008 8:56 pm
By JOHN DUNBAR
Associated Press Writer
WASHINGTON (AP) — Mortgage industry representatives told skeptical lawmakers Wednesday that investors in mortgage-backed securities are not hindering government efforts to stem an increasing tide of foreclosures.
“Because foreclosure is usually the most costly means of resolving a loan default, it is typically the least-preferred alternative for addressing a defaulted loan,” Tom Deutsch, deputy executive director of the American Securitization Forum, told the House Financial Services Committee.
Mortgage service companies that handle billing, property taxes and other tasks have the power to modify loans and are obligated to if the change produces less of a loss for an investor than a foreclosure would, he said.
Lowering the interest rate or reducing the principal on mortgages that have been bundled into securities would cut monthly payments for strapped homeowners. But that also would lock in lower yields for investors.
“Fear of being sued by unhappy investors has served as powerful disincentive for mortgage services considering whether to modify a troubled borrower’s mortgage,” said Alabama Rep. Spencer Bachus, the committee’s top Republican.
Another deterrent is that the service companies mailing out statements and taking in monthly payments from homeowners earn fees or commissions on foreclosures, but not on loan modifications.
Thirty years ago, banks that issued the loans usually owned them. But today, a mortgage — or a portion of it — is just as likely to be owned as a mortgage-backed security by a pension fund or other investor.
The Federal Reserve says $2.8 trillion of the $14.8 trillion in outstanding mortgage debt in the U.S. is held in private mortgage-backed securities created through loan pools.
Mortgage underwriters Fannie Mae and Freddie Mac — both now taken over by the government — created $4.8 trillion in securities on mortgages they purchased from original lenders.
The committee chairman, Rep. Barney Frank, D-Mass., said he has heard too many stories from people unable to get mortgage help to believe there is not a problem. He suggested new legislation may be needed beyond bills that Congress passed in August and October providing federal loan guarantees for renegotiated mortgages.
“Who am I going to believe, you or my own eyes?” Frank asked.
Deutsch said mortgage servicers could be sued for “over-modification” but are equally liable for not doing enough.
Benjamin Allensworth, legal counsel for the Managed Funds Association, which represents large hedge funds, said they, too, believe that effective mortgage modifications are preferable to foreclosures.
But he said hedge funds are opposed to a one-size-fits-all formula for determining whether vast numbers of borrowers should qualify for help. They also worry that a qualified borrower may again get into trouble and default, he said.
On the Net:
House Financial Services Committee: http://tinyurl.com/67ltrp