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Dodd, Frank want regulators to fix loan mod problem

WASHINGTON (7/13/09)--Senate and House financial heavyweights Sen. Chris Dodd (D-Conn.) and Rep. Barney Frank (D-Mass.) have asked federal regulators to look into possibly inflated valuations of some second mortgages that are being held on banks balance sheets to aid government-sponsored assistance for distressed homeowners.

According to a Friday letter sent to the leaders of the National Credit Union Administration, the Federal Reserve, the Federal Deposit Insurance Corporation, and other federal regulatory entities, carrying mortgage loans at "potentially inflated values" could prevent loan servicers from negotiating "the disposition of these liens" and "may stand in the way" of "increasing participation" in the Obama administration's Hope for Homeowners (H4H) mortgage adjustment program.

Another issue facing the H4H program is the "unwillingness of subordinate lien holders to extinguish their liens" in order to participate in the program.

H4H allows eligible homeowners to refinance their subprime mortgage loans into fixed-rate, FHA-backed loans. The H4H program also allows the subordinated lien holders to share in any future appreciation of the property as a means to encourage them to participate in the program.

In the letter, Dodd and Frank expressed concern that "significant volumes" of "closed-end second mortgages or home equity lines of credit" are being held on the balance sheets of large mortgage servicers, adding that the "loss allowances associated with these subordinated liens may be insufficient to realistically and accurately reflect their value... in light of the historically poor performance of first lien mortgages" and the "diminished values of the underlying collateral."

The legislators urged federal authorities to look into this issue "as expeditiously as possible."

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