Senate Passes Servicer Safe Harbor

The Senate voted 91-5 in favor of S 896, the Helping Families Save Their Homes Act of 2009, which includes legal protection for servicers that modify residential mortgages. Five Senate Republicans voted against the housing bill.

The safe harbor protects mortgage servicers from lawsuits by investors holding relevant modified mortgage bonds.

The provision is intended to encourage more servicers to modify more mortgages, but critics say it will hurt private investors whose funds help maintain banks’ liquidity and stimulate lending.

Modifications often involve altering original mortgage terms and forbearing a portion of the principal for lump repayment at the end of the loan life. The reduced principal lowers monthly payments, increasing affordability for borrowers and consequentially reducing the monthly return for investors.

If the mortgage is securitized, then the principal payment coupons, or pass-throughs, will also take a hit. For the long investor, change to term is a bad thing and likely to shake-up an already nervous financial market.

However, the aim of the bill essentially provides legal protection for servicers to alter mortgage contracts and, as the argument goes, investor contracts where mortgages have been securitized.

The bill also changes the borrower certifications under Hope for Homeowners, a program that encourages refinancing into Federal Housing Administration-guaranteed mortgages. The bill’s changes mean borrowers going forward must provide proof they didn’t intentionally default on their mortgage in order to qualify.

The bill provides the Federal Deposit Insurance Corp. with increased borrowing authority, extends the time period for restoration of the insurance fund from five to eight years, provides a temporary extension of the FDIC’s $250,000 deposit insurance limit. Supporters of the bill say these changes will bolster confidence in the FDIC and meet banks’ lending needs.

“During this time of economic uncertainty, bankers recognize the importance of maintaining public confidence in the FDIC,” American Banker Association executive director Floyd Stoner. “We also believe that it is important to strike the right balance between maintaining a strong deposit insurance fund without unnecessarily taking money out of the system.

Write to Diana Golobay.