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John Berlau of Competitive Enterprise Institute talking points on - - Why Mortgage Servicer “Safe Harbor” is * Anti-Contract,
1. A centerpiece of President Obama’s Home Affordable Modification Program pays banks servicing mortgage $1000 per loan modified.
2. This approach has many flaws; it rewards banks and borrowers for foolish loans that were made. It may also not help trouble borrowers that much as modifications have had 50 percent redefault rates. And it increases taxpayer costs. As Gretchen Morgenson of the NY Times, puts it, “at $1000 each,” this is “a bounty that could reach $10 billion”
3. “Bounty” is an apt term to describe the worst flaw in the program. It pays banks for losses they do not take on mortgages they do not hold. And it leaves completely uncompensated the investors who hold mortgage-backed securities – investors who include mutual funds, 401(k)s, IRAs, and 529 college savings plans. In other words, the savings vehicles of the middle class.
4. The contracts between servicing banks and mortgage investors – known as “pooling and servicing” agreements spell out that servicers must work in the best interests of investors. Many have specific guidelines as to when modification can occur. But the “Helping Families Save Their Homes Act” that passed the House (HR 1106) and is pending in the Senate (S. 896), has a “servicer safe harbor” provision that would let banks basically rip up these contracts to investors and say servicers “shall not be liable” regardless of what the contract says.
5. The NY Times’ Morgenson says, “Individual investors could be harmed if this bill becomes law.” William Frey of Greenwich Financial Services calculates that this could reduce the value of mortgage assets held by investors – frequently in middle class savings vehicles – by 30 percent or hundreds of billions of dollars.
6. Given the fact that many Democrats balk at common-sense tort reform to combat abuses like medical malpractice suits, the liability exemptions in this bill that would benefit big banks like Bank of America-Countrywide are truly striking. The “safe harbor” is not to deter frivolous lawsuits. It would prevent courts from hearing the basic breach-of-contract suits that the Founding Fathers created courts to adjudicate.
7. Giving banks the power to modify investors’ loans with no liability also opens up various conflicts of interests. Banks often have “second liens” from the same homeowners on their own books, while the first liens are owned by investors. Under the contracts, first lien holders are to be compensated in case of default before the second lien holders get a dime. But the modification encouraged by the “safe harbor” would do just the opposite: reduce the value of the “first lien” mortgage while the second goes untouched. This would wreck havoc with many savings vehicles, as the reason they bought first lien loans was the higher level of safety spelled out in the contracts. For more info, contact John Berlau, Competitive Enterprise Institute, (202) 331-2272, jberlau@cei.org
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