The six big agencies that regulate most of the nation's banking system issued
"guidance" Tuesday encouraging mortgage servicers to work with
borrowers to mitigate
loan losses and keep families in their homes where "possible and appropriate."
The Federal Deposit Insurance Corporation, Board of Governors of the Federal
Reserve System, Office of the Comptroller of the Currency, Office of Thrift
Supervision, National Credit Union Administration, and the Conference of State
Bank Supervisors issued a joint statement directed at federally regulated institutions
(and with the Conference of State Bank Supervisors (CSBS) signing on, many state-supervised
entities as well) entitled Statement on Loss Mitigation Strategies for Servicers
of Residential Mortgages.
The federal agencies have issued two previous statements which attempted to
apply gentle pressure to lenders as subprime problems
and borrowers began to experience problems making payments. In April of this
year they issued A Statement on Working with Mortgage Borrowers and in July
Statement of Subprime
both of which asked lenders to work constructively with
borrowers who were flirting with default. CSBS and its companion agency the
American Association of Residential Mortgage Regulators (AARMR) have mirrored
earlier federal statements with similar guidance for their state regulated constituents.
The earlier statements were intended to encourage flexibility for mortgage
loans held in the portfolios of banks and credit unions. This statement is aimed
at companies that are servicing subprime and other mortgage loans that have
been sold or transferred into securitization trusts. A number of the servicing
companies (Wells Fargo and WaMu for example) are subsidiaries of government
While the statement is not binding on the servicing companies, it asks that
they review the governing documents for the securitization trusts to see how
much authority they have to restructure loans that are in risk of default. The
statement points out that these documents may permit the servicer to be proactive
in contacting borrowers and, where appropriate, apply loss mitigation strategies.
It outlines four areas where servicers could be proactive:
- Identifying borrowers at heightened risk of delinquency or default;
- Contacting borrowers to assess their ability to repay;
- Assessing whether default is "reasonably foreseeable;"
- Exploring a loss mitigation strategy that avoids foreclosure or other
actions resulting in the loss of homeownership.
The statement said that loss mitigation is generally less costly than
foreclosure, particularly when undertaken early in the process. Such
strategies can include loan modifications; deferral of payments, extension of
the loan term, conversion of ARMs into fixed rate or fully amortizing ARMs,
capitalization of delinquent amounts, or a combination of solutions.
The statement urged services to consider the borrower's ability to repay
the modified mortgage over the long haul, taking into account not only the mortgage
payment but taxes and insurances as well as other obligations and resources.
Servicers were encouraged by the regulatory agencies to refer borrowers to
appropriate homeownership counseling services or to government programs such
as those run by FHA.
The statement also noted that reduction or forgiveness of debt may result in
tax liabilities for the borrower as such forgiven amounts can be treated as
other income by the IRS and it was this subject that President George W. Bush
returned to in his regular Saturday radio broadcast.
The President, while stating
again as he had on Friday that the Federal government will not bail out
lenders or speculators nor would it step in to redeem borrowers who made a decision
to buy homes they knew they could never afford said he has made it a priority
"to help American homeowners navigate these (present) financial challenges so
that as many families as possible can stay in their homes." He called again
on Congress to change the Federal tax code so that borrowers who lose their
homes to foreclosure or are forced to sell them for less than the mortgages
balance do not have to pay taxes on the forgiven debt. He also called on Congress
to act quickly on legislation that will restructure the Federal Housing Administration
and allow more Americans qualify for the insurance available through it.