Mortgage sector uneasy with loan rewrite plan

WASHINGTON (Reuters) - Leaders of the U.S. mortgage industry are uneasy with a plan that would give home loan servicers legal protection if they try to help troubled borrowers avoid foreclosure, lawmakers heard on Tuesday.

Such a step could discourage mortgage investment and "potentially threaten the stability and predictable operation of ... our capital market system," the American Securitization Forum, a mortgage investing trade group, told a congressional hearing.

Home loans originated by banks and other mortgage retailers are typically bundled and sold to investors as new securities overseen by mortgage service companies. If a borrower is in danger of defaulting, the mortgage service company has broad power to rewrite the loan but investors may still sue if they second-guess those changes.

Legislation sponsored by Rep. Paul Kanjorski and Rep. Mike Castle would shield mortgage servicers from such lawsuits.

"Without this legislation, I am concerned that lawsuits could bring modifications to a halt," Castle, a Delaware Republican, said this week of his legislation.

Mortgage services companies have rewritten home loans for many thousands of borrowers who are being pushed to the brink of foreclosure. A rising wave of failing loans has for months been pushing the U.S. economy toward recession.

Ralph Daloisio, chairman of the ASF investor committee, warned that the legislation as written could damage the underpinnings of the housing finance system.

"All parties to a contract, including investors, rely on the legal, valid, binding and enforceable provisions of the governing contracts," he told a panel of the House Financial Services Committee chaired by Kanjorski, a Pennsylvania Democrat.

While Kanjorski and Castle have said their legislation would remove an obstacle to modifying home loans, others in the industry warned that it might unduly disrupt conventions of the mortgage finance sector.

"We are concerned this bill may create investor uncertainty ... despite the care the drafters took in trying to balance the interests of investors and servicers," said Robert Story, vice chairman of the Mortgage Bankers Association.

(Editing by James Dalgleish)