Consumer Law

Loan Modifications and PSA contract limits

By Alan White

One of the obstacles to preventing foreclosures through loan modifications has been the restrictions in securitization contracts. The pooling and servicing agreements ("PSAs") that create securitization trusts usually limit the servicer's authority to rewrite mortgage terms on behalf of the investors, even when the modification will prevent a foreclosure and produce a higher return than foreclosure. PSA provisions vary, but it is not uncommon for the servicer's discretion to be limited by a percent-of-pool cap on modifications.

Residential Funding Corp., an affiliate of GMAC and securitizer of subprime mortgages, recently requested and obtained approval from bond rating agency Moody's (Download) to increase the 5% cap on loan modifications in seven loan pools.

The particular contract term in one of the RFC-sponsored trust agreements (Download) is interesting because although it contains a 5% modification cap, it permits the cap to be increased, with the consent of the rating agencies and the insurer (and without the need for consent of the investors). This farsighted PSA contract term solves at least one of the problems that has prevented mutually beneficial mortgage modifications by other servicers. Kudos to whoever drafted this contract! The pool in question has reached a 20% foreclosure rate and cumulative net losses of 2.38%.

HT to Kevin Byers for spotting this on HousingWire.

Full post as published by CL&P Blog on May 29, 2008 (boomark / email).