Banks balk at Treasury mortgage loss guidance

NEW YORK (Reuters) - Some of the biggest home mortgage companies are balking at the U.S. Treasury's guidance to recognize losses after making certain loan modifications. according to Amherst Securities Group.

Mortgage servicing companies, including Bank of America Corp (BAC.N) and Wells Fargo & Co (WFC.N), said in a survey by investors they do not plan to mete out losses when forbearing principal for homeowners, as is recommended in recent Treasury guidance, Amherst said in an August 18 report.

Citibank Inc's (C.N) Citimortgage is among those that told the Mortgage Investors Coalition that it would follow the Treasury guidance on that type of modification.

The dispute among servicers is likely to hinder their efforts to carry out President Barack Obama's plan to ease terms on up to 4 million loans in a bid to slow foreclosures that threaten the U.S. economic recovery, Amherst said.

What to do with principal has become a hot point as falling residential home prices remove incentives for borrowers to stay in their homes, and has been correlated with the rise in defaults and foreclosures. Nearly a quarter of all mortgage balances were above the value of the home last quarter, according to a Zillow real estate report.

Until the forbearance issue is clarified, "we anticipate only a small number of modifications requiring principal forbearance," the analysts said in the note.

The servicers are concerned that recognizing losses on the mortgage when a portion of the principal is pushed to the end of the loan, instead of forgiven, will invite lawsuits, the analysts, led by Laurie Goodman, said. In several instances, the servicers also own the junior portion of mortgage-backed securities that would take the hit, they added.

JPMorgan Chase & Co (JPM.N) and GMAC Mortgage also told the investors' group that they are not following the guidance.

Servicers in explaining their positions noted that contracts governing mortgage bonds do not dictate a principal forbearance as a realized loss. This appears to fall under a caveat to the Treasury's guidance that defers to directions under the pooling and servicing agreements, according to some of the comments in the survey, posted by Amherst.

Bank of America in the survey said more legal analysis was needed. JPMorgan said that it would defer to the trustee, after initially noting that forbearance should result in a loss.

The controversy illustrates the conflicting agendas of investors in a mortgage bond, which is structured in parts from most to least risky, Amherst said. Senior holders benefit if a loan is written down sooner, but junior holders would take losses more quickly, the analysts said.

An investor group of the American Securitization Forum in a letter last week supported the Treasury guidance, noting the "economic value" of forborne principal is low since it does not accrue interest and won't be repaid until maturity.

The Mortgage Investors Coalition, which represents more than $100 billion in assets, has asked servicers to confirm that they would treat forborne principal as a loss, but none have responded, Amherst said.

(Editing by Andrea Ricci)