Ebook Recent Developments in Residential Mortgage Loan Modification Programs
Residential mortgage loans are currently experiencing historically high levels of defaults and foreclosures, and many borrowers have lost their homes. As a result, lenders and government sponsored entities have announced widespread loan modification or guarantee programs in recent months designed to limit foreclosures and keep homeowners in their homes. Some of these programs apply to securitized loans, while others currently do not.
Securitized loans are often perceived as more difficult to modify than portfolio loans because of contractual provisions in securitization servicing agreements that limit or restrict the ability of servicers to modify securitized loans. In addition, servicers must consider the interests of a securitization trust as a whole in dealing with problem loans, notwithstanding the different classes of investors and their differing interests. Senior investors may favor foreclosures because they recover principal even if the junior investors take a large loss on a foreclosed loan. Conversely, junior investors may favor modifications because they are first in line to absorb losses from foreclosures. These differing interests, as well as servicer concerns about adherence to contractual limitations, have made it more difficult for servicers to pursue widespread modification programs with respect to securitized loans.
Various governmental authorities have promoted the public policy interest in limiting foreclosures to keep homeowners in their homes and potentially limit the decline in house prices. Ben Bernanke, the Chairman of the Federal Reserve Board of Governors, recently expressed concern over the lack of modifications occurring with respect to securitized loans in a speech on Housing, Mortgage Markets and Foreclosures. Members of Congress have threatened to take legislative action to promote or require loan modifications if significant modifications do not occur. In light of this increased focus on loan modifications, this memorandum summarizes the initiatives that have been adopted to date and addresses some of the significant considerations that could affect their successful implementation.
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