Congress Looks to Shield Servicers from Liability in Loan Modifications

Seeking to blunt a potential roadblack that many mortgage servicers have said still exists, Congressmen Michael N. Castle (R-DE) and Paul E. Kanjorski (D-PA) introduced a bill late Tuesday designed to shield servicers from potential legal liability arising from bulk loan modification efforts.

H.R. 5579, the Emergency Mortgage Loan Modification Act of 2008, would provide a legal safe harbor for mortgage servicers making loan modifications, under certain defined conditions. In spite of efforts by the Treasury and other adminstration officials to spur on voluntary loss mitigation efforts, including the ASF-outlined rate-freeze program for subprime borrowers, many have said that investors remain at odds over loan modifications.

Part of the problem, as HW covered earlier, may be that the highest-rated securities in most subprime RMBS deals have yet to suffer a wave of downgrades; the result, sources say, is that investors in different classes are at odds with each other over what is in their best interests.

“I think it’s in the best interests of at-risk homeowners and investors to work out payment terms that give a homeowner financial stability and the investor some return for their investment,” Congressman Castle. “Without this legislation, I am concerned that lawsuits could bring modifications to a halt.”

If enacted, the bill would give mortgage loan servicers greater confidence to work out new loan terms with struggling borrowers, Castle said.

Kanjorski said the bill generates a “win-win” situation for borrowers, servicers, and investors.

“Investors in mortgage-backed securities, as a whole, win because their investments’ values increase due to fewer expected mortgage defaults,” he said. “Importantly, the bill accomplishes all of this without violating private contracts.”

“I hope the committee will deal with this bill as part of a package to stem the number of foreclosures in America,” said Barney Frank (D-MA), chairman of the House Committee on Financial Services. “As with all of the forthcoming initiatives on foreclosure avoidance, we are open to further discussions on the policy,” said Chairman Frank. “I believe this is the direction we should be moving, and given the newness of the issues, no one should have a closed mind about this.”

The text of the new bill has not yet been published online, but H.R. 5579 is a substitute for H.R. 4178, which Castle introduced last year. Read the original bill’s text by clicking here.