Mortgage Servicers Balk At Debt Forgiveness Proposal For Home Mortgages

A Debtwire article appearing in Financial Times reports:

• Mortgage servicers modifying loans under Hope Now are unlikely to allow principal forgiveness readily, especially when the loans have been securitized, servicers and industry analysts told Debtwire. That may lead to temporary forgiveness through the creation of soft second lien loans, said one industry consultant. In a speech before the Independent Community Bankers of America last week, Federal Reserve Chairman Ben Bernanke encouraged servicers to use principal forgiveness for loss mitigation. He argued that principal writedown makes solid economic sense in some cases, notably when stressed borrowers owe more on their mortgages than their houses are worth.

• But servicers face strong disincentives to paring down non-performing mortgages because of potential legal exposure should RMBS investors decide they are unwilling to write down principal. What’s more, documents governing the securitization may not allow for such modifications. Even if servicers have the will to forgive debt, they may not have the systems or personnel in place to handle this type of modification.

For more, see Mortgage principal forgiveness will meet resistance from servicers.