Pooling and servicing agreements vary greatly on principal reductions

Pooling and servicing agreements provide the contractual barriers governing securitized loans held in trust.

The PSA is filed with the Securities and Exchange Commission for every public offering of mortgage bonds to investors. PSAs dictate the responsibilities mortgage servicers hold when dealing with related loans, and vary greatly when dealing with the issue of principal reductions.

In a recent interview with community housing publication Shelterforce, Ocwen Financial (OCN) CEO Ron Faris said when reviewing PSA agreements, he found very few actually explicitly prevent principal reductions and other loan modifications. 

Yet attorneys who deal with PSAs daily say this is not always the case, and there is a genuine lack of consistency when it comes to how different pooling and servicing agreements are constructed.

Rob Mowrey, a partner at Locke Lord in Dallas, said PSA agreements often share the same or similar provisions, but in other situations, some of the information is used again with alterations. 

“It can even be altered in a way that makes the provisions materially different,” Mowrey explained. “There are some that prohibit principal reductions unless there is a default; and then they say if there is a default, you can get a principal reduction if it doesn’t materially or adversely effect the holder.”

Other PSAs say you need consent to do a principal reduction. “It really depends on the particular pooling and servicing agreement,” Mowrey added. “You may see phrases (in different PSAs) that are very common, but in my estimation, it is rare to see an entire provision that is the same,” Mowrey explained.

Dallas attorney Talcott Franklin, who has been spearheading a number of the RMBS investor lawsuits over securitized loans, shared similar experiences with PSAs.

“In my experience, some pooling and servicing agreements offer more room for modifications than others,” he explained. “Variations range from a lack of express limitations on modifications, to limitations as to the percentage of loans that can be modified, to an outright prohibition on modifications.”

“However, other provisions of the agreement could also limit the types or methods of modifications,” he added. “For example, a servicing standard that requires acting in the best interest of the trust could limit modifications that benefit the servicer rather than the investors.”  

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