Loan Modification

Paul,
 
I registered and watched your seminar on broken credit. It was very informative. (thanks)
 
I called my mortgage co. about one of my investment properties and asked for the loss mitigation department and requested a work-out package. After getting the runaround for a LONG time, they informed me their policy is to wait until I am 60 days past due. I do not have a single mortgage late and would like to keep it that way. Any suggestions?
 
Chris

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Hello Chris,

Your loan payments are made to a mortgage servicer, but that company is likely only an agent for the owner of the loan.  The majority of mortgage loans in the U.S are packaged into pools and sold to individual and institutional investors through securitization.  The owner of a securitized mortgage loan is typically a financial institution or bank acting as trustee for a loan trust.   Under the Truth In Lending Act, “upon written request of the obligor, the servicer shall provide the obligor, to the best knowledge of the servicer, with the name, address, and telephone number of the owner of the obligation”.  In other words, you may write to your mortgage lender to determine the identity of the owner of your mortgage loan.

The parameters whereby a securitized mortgage loan may be modified are determined by its pooling and servicing agreement (PSA).  Sheila C. Bair, Chairman of the FDIC, noted the following in her April 17, 2007 testimony:

When difficulty arises in making payments on a securitized loan, the borrower generally will not be dealing with the local banker with whom there might be an established relationship. Instead, the borrower will be dealing with a servicer. The servicer has responsibilities defined in the securitization documents that are substantially different than those of a lender. The servicer and the trustee are responsible for taking actions that are in the best interest of the investors who purchased portions of the securitization. Protecting the investors means determining the best alternative that would bring the maximum recovery on a defaulted loan on a present-value basis. If the servicer determines that a workout or modification of the loan achieves that goal, then there is an alignment of the investor/servicer/borrower relationship. However, if liquidation of the collateral (through a foreclosure or other means) results in the highest net present value of cash flows, the servicer may be bound by the terms of the securitization to pursue this approach to the benefit of the investor despite the resulting detriment to the borrower.

Even if a modification to the loan looks like the right approach, other factors might limit the servicer’s options. Most securitizations are established as Real Estate Mortgage Investment Conduits (REMICs). The REMIC structure provides considerable tax benefits, (i.e., only the investors are subject to tax, not the conduit itself) but also includes provisions that could limit the flexibility of a servicer to modify a borrower’s loan terms in a proactive manner. To qualify for tax-advantaged status, the pool of loans securitized in a REMIC must generally be treated as a static pool, which usually precludes modifying loans in the pool. An exception to this general prohibition allows for modifications when default is reasonably foreseeable. Once a determination is made that default is reasonably foreseeable, most securitization agreements provide significant flexibility for the servicer to modify terms of the loan. This allows for modification of terms when a loan has defaulted, but may prohibit changes to loans that are current.

The Internal Revenue Service (IRS) leaves it to servicers to determine what “reasonably foreseeable” means as it relates to default, which makes these determinations dependent upon the facts and circumstances of each mortgage. In many cases, servicers would likely need to seek legal determinations from outside counsel, especially with respect to whether a default was reasonably foreseeable, in order to modify loans in the pool. Some securitization documents indicate that once a loan is delinquent for a certain amount of time, for example, 60 days, modifications of the terms may be allowed, subject to REMIC laws. In some deals, the servicer must certify with a legal opinion that a modification of loan terms would not result in an adverse REMIC event. Therefore, while some flexibility is available, the specifics are often unclear. Further clarification regarding permissible modification activities under REMIC laws would improve the servicer’s ability to work through problems with the borrower.

Aside from the restraints imposed on modifications by the REMIC structure, the PSA can also impose barriers to loan modification. The language in each PSA is different and each establishes the rules about how a particular securitization operates or what needs to be done to change those rules. Many PSAs contain more than 200 pages of dense legal verbiage. The PSA provides a blueprint as to how cash flows and losses are allocated and distributed to the various parties, and establishes the rules that the servicer must abide by in managing this critical function in the transaction. The PSA sets forth whether and how a servicer can modify the underlying loans in a securitization. The documents will also identify the other parties in the transaction who might have an important role in this decision.

Chris, once you’ve learned the identity of the owner of the mortgage loan (i.e. Deutsche Bank National Trust Company, as Trustee on behalf of WaMu Mortgage Pass-Through Certificates Series WMALT 2046-2) then it may be advantageous to review the PSA.  If yours was a publicly traded Mortgage Backed Security, the PSA will be available online at Sec.gov.  Either way, it seems to me the issue will probably depend on what one deems “reasonably foreseeable”. 

Thanks for the questions and hope this helps.

Paul

This author is not an attorney and this information should not be considered legal advice.  Please consult an attorney for legal advice.

(source= fdic.gov/news/news/speeches/chairman/spapr1707.html)