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Randy Kroszner, on Mortgage Loan Modification

He speaks:

FRB: Testimony--Kroszner, Loan modifications and foreclosure prevention--December 6, 2007: We believe that investors and servicers generally want to work with borrowers to avoid foreclosure.  Prudent loss mitigation techniques that avoid foreclosure not only help homeowners, they are usually cost-effective for investors.  Borrowers who have been current in their payments but could default after reset, for instance, may be able to work with their lender or servicer to adjust their payments or otherwise change their loans to make them more manageable.  Working with borrowers before they experience payment problems has other benefits; for instance, late payments will not have affected such borrowers' credit scores, preserving a wider range of options including refinancing.  Such proactive outreach by servicers may mean the difference between loan payment and default, particularly for lower-income families who may have little financial cushion. 

Given the substantial number of resets expected from now through the end of 2008, it is in the interest of the industry to go further than it has historically to join together and explore collaborative, creative efforts to develop prudent loan modification programs and other assistance to help large groups of borrowers systematically.  Such programs can streamline and speed the process of anticipating and addressing delinquent loans, reduce transaction costs, and provide guidance to borrowers and to mortgage counselors.  Many servicers are, in fact, working with counselors who can play a crucial role in helping homeowners, many of whom do not even communicate with their servicers out of fear, embarrassment, or misinformation about their options.  Loan modification programs should be a bottom-up approach designed to balance the needs of all parties, and we are encouraged by the progress being made by the industry in advancing such programs. 

Because systematic approaches to dealing with troubled loans are often likely to lead to better aggregate investor returns than foreclosures, we are encouraged by industry efforts to pursue these approaches.  When servicers modify loans, however, they may face potential litigation risk from investors because of their contractual obligations under the servicing agreements.  One particular source of litigation risk, we understand, may be that different asset classes have conflicting interests.  Therefore, we encourage ongoing industry efforts to agree to standards for addressing these issues.  We are hopeful that the industry can resolve these conflicts on a consensual basis so that they do not preclude servicers from taking actions that are in the overall best interests of consumers and the industry.

More generally, the Board supports efforts by the industry and others to develop reasonable and standardized approaches to dealing with these challenges.  Such approaches, when applied consistently and predictably, can reduce uncertainty and ultimately help the markets function.  Prudent workout arrangements that are consistent with safe and sound lending practices are generally in the long-term best interest of both the financial institution and the borrower, but there may be instances when such arrangements are not prudent or appropriate.  In trying to help homeowners, we must also be careful to recognize the existing legal rights of investors, avoid actions that may have the unintended consequence of disrupting the orderly functioning of the market, or unnecessarily reducing future access to credit.  Provisions intended to immunize servicers from liability should be crafted to avoid creating moral hazard of parties disregarding their contractual obligations, which would ultimately have negative impacts for markets and consumers.  Sustainable solutions, and not those that simply hide for the short term real repayment challenges, should be our goal...