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AG cramdown efforts get some Hill heat
WASHINGTON (3/11/11)--Legislators this week criticized a potential mortgage modification settlement that a group of state attorneys general and mortgage servicers are negotiating, with Senate Banking Committee Ranking Member Richard Shelby (R-Ala.) calling the discussions an “end-around” past Congress. A group of state attorneys general and several federal agencies have been negotiating a settlement agreement with the major mortgage servicers which could create a loan modification process similar to mortgage cramdown proposals. A cramdown proposal that proposed to permit judicial modification of mortgage terms under the bankruptcy law was pushed back in 2009, and similar legislation has not been brought to the floor in Congress since then. Speaking during a Wednesday committee hearing on the state of the housing market, Shelby said that the cramdown discussion raised “serious concerns” and requested that his committee look into these developments immediately. Shelby also called on federal government agencies to delay any related actions. Republican members of the House also criticized the negotiations in a recent letter, saying that the settlement, if imposed, “would transform the mortgage servicing industry and fundamentally change the rules that have historically governed relationships among borrowers, servicers and investors.” The letter also questions whether the Obama administration and state agencies “are attempting to legislate through litigation,” and asked U.S. Treasury Secretary Tim Geithner to respond to a number of detailed legal and policy questions. The letter questions what authority grants federal and state regulators the power to require mortgage principal writedowns or to legislate new mortgage servicing industry standards. The state attorneys general have circulated a 27-page outline of what they would like to see in a settlement agreement to address concerns about how mortgage servicers have handled foreclosures. One of the so-called "remedies" proposed by the attorneys general is "a loss mitigation duty," which would require covered servicers to "thoroughly evaluate borrowers for all available loss mitigation options prior to foreclosure referral." This would apply to all eligible borrowers, including borrowers in bankruptcy. Servicers subject to the agreement would have to "facilitate" modifications, such as helping to fill out the application, when a modification would result in a greater "net present value" (NPV) than foreclosure. Servicers would be expected to "consider and apply" reductions in principal and in bankruptcy cases to reduce the interest rate on a mortgage loan to zero percent for the first five years. The proposed agreement envisions the new Consumer Financial Protection Bureau involved in monitoring the calculation of the NPV, as well as other aspects of the agreement. Credit Union National Association General Counsel Eric Richard said that the CFPB’s involvement raises questions as to whether some terms of the agreement could become standards applied to mortgage lenders in general. CUNA continues to closely monitor the situation. (See related March 10 story: State AGs want principal adjustments before foreclosure.)


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