Statements on Introduced Bills and Joint Resolutions

Floor Speech

STATEMENTS ON INTRODUCED BILLS AND JOINT RESOLUTIONS -- (Senate - April 23, 2008)

By Mr. SPECTER:

S. 2901. A bill to encourage residential mortgage loan modifications and workout plans, and for other purposes; to the Committee on Banking, Housing, and Urban Affairs.

Mr. SPECTER. Mr. President, I have sought recognition to introduce a bill to give mortgage servicers an incentive to work out new loan terms with struggling homeowners who are falling behind in their mortgage payments. It is possible to avoid foreclosure in some cases by reworking the payment terms on mortgages. Investors, however, would have to accept a smaller return on their investment than they otherwise may have expected. As a result, businesses that service mortgage loans may fear litigation from investors who are the direct or indirect holders of those mortgages. This concern may be slowing the pace of or stopping loan modifications. In testimony on December 6, 2007, before the House Committee on Financial Services, Mark Pearce, speaking on behalf of the Conference of State Bank Supervisors, testified that at a meeting with the top 20 subprime servicers ``many of them brought up fear of investor lawsuits'' as a hurdle to voluntary loan modification efforts.

The loan servicers have a legal duty to the investors to maximize the return on their investments. But in light of the current and changing economic environment, and the new and complex financial vehicles that hold mortgages, this ``duty'' is not simple or clear. This bill clarifies matters by stating that, absent contract provisions to the contrary, the duty is owed to the investor group as a whole, and not to individual investors or classes of investors. In addition, the bill clarifies that the servicer satisfies that duty by ensuring that the return from a mortgage, as modified, exceeds the return that would be expected from foreclosure. This may include agreeing to mortgage modifications or workout plans when a homeowner is in payment default, or when default or foreclosure appears imminent. Although some investors may get a smaller return than they may have expected, in the long run, taking these actions will be in the best interest of all investors.

This bill is not a bailout. The bill honors contract provisions that may be contrary to provisions in the bill. This bill would not solve all of the problems we face today, but it is an important step in removing barriers that may slow progress as we work to solve the home mortgage crisis.

This bill is necessary because regulation has not kept pace with innovation. Years ago, a homeowner would obtain a mortgage from a local bank. If he couldn't make the mortgage payment, the bank often would be willing and able to offer a workout, modifying the loan's terms to make it affordable. The bank would do this because whatever amount the borrower could pay would be worth more to the bank than foreclosure. Foreclosure has its costs, sometimes as much as half the value of the mortgage, and banks did not want to have to resell the home, so the calculation was often simple. Today, however, many mortgages are often bundled together with others mortgages and are sold to investment banks, who in turn slice and dice the bundles to produce securities that are rated by rating agencies and sold to investors all over the world.

Investment banks that issue securities backed by mortgages typically divide the securities into tranches, with some tranches having claims that are senior to other more junior tranches. None of this, of course, is transparent to the homeowner, and servicers face a complex situation. Servicers should not have to first determine precisely how a loan modification will affect the various tranches of investors and then make choices among the groups. If the servicer reasonably believes that a modification increases the net present value of the investment as a whole, it should be able to agree to the modification.

This month, Federal Reserve Chairman Ben Bernanke encouraged the nation's bankers to write down the principle on millions of mortgages. He said banks have not made nearly enough modifications to stop foreclosures. But there has been some progress. Treasury Secretary Paulson reported this month that ``since July more than one million struggling homeowners received a workout--either a loan modification or a repayment plan that helped them avoid foreclosure.'' In January alone, there were 167,000 such modifications, with the number of borrowers receiving help rising faster than the number of foreclosures. Congress needs to ensure that these modifications continue, and that they continue at a rapid pace.

We are faced with a crisis caused by mortgage brokers who pushed risky loans on homeowners, homeowners who assumed the value of their home would always increase, conflicts of interest at credit rating agencies, bond underwriters who loosened standards, lax regulators, and financial institutions that ignored the risks in the instruments they were buying and selling. There is plenty of blame to go around but Congress must now take steps to prevent similar problems in the future. Right now, we must do what we can to keep families in their homes by encouraging the companies that service mortgages to modify mortgages where it will prevent foreclosure. This bill will encourage servicers to make such modifications and I urge my colleagues to support it.

Mr. President, I ask unanimous consent that the text of the bill be printed in the Record.

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