Federal Banking regulators including the Federal Reserve, the FDIC, and OTS on Tuesday urged mortgage servicers to pursue loss mitigation initiatives designed to sustain homeownership for troubled borrowers. Part of the mitigation strategies outlined in the statement was proactive, early identification before a missed payment hits the books. This full statement on loss mitigation strategies is available here. The FDIC also released a separate press statement reinforcing that loan workouts should not put borrowers in situations where resulting debt-to-income ratios exceed 50 percent. From the joint statement, perhaps the most pertinent part:

Servicers of securitized mortgages should review the governing documents for the securitization trusts to determine the full extent of their authority to restructure loans that are delinquent or in default or are in imminent risk of default. The governing documents may allow servicers to proactively contact borrowers at risk of default, assess whether default is reasonably foreseeable, and, if so, apply loss mitigation strategies designed to achieve sustainable mortgage obligations. The Securities and Exchange Commission (SEC) has provided clarification that entering into loan restructurings or modifications when default is reasonably foreseeable does not preclude an institution from continuing to treat serviced mortgages as off-balance sheet exposures. Also, the federal financial agencies and CSBS understand that the Department of Treasury has indicated that servicers of loans in qualifying securitization vehicles may modify the terms of the loans before an actual delinquency or default when default is reasonably foreseeable, consistent with Real Estate Mortgage Investment Conduit tax rules.

Note that federal regulators are encouraging loan modifications here — Gretchen Morgenson at the NY Times, are you listening?