Rep Frank targets mortgage service legal pacts

By Kevin Drawbaugh

WASHINGTON (Reuters) - Congress needs to tackle legal obstacles that prevent mortgage servicing companies from doing more to help distressed borrowers stay in their homes, the head of a U.S. congressional committee said on Wednesday.

Moving on a new front to attack the nation's financial crisis, Rep. Barney Frank called for legislation to address contractual agreements that can bar servicing companies from substantially changing the terms of troubled mortgages.

The Bush administration has thrown an assortment of costly bailout programs at the crisis, mainly focused on helping Wall Street, leading to criticism that too little is being done to reduce home foreclosures and help ordinary citizens.

Frank, a Massachusetts Democrat who chairs the House of Representatives Financial Services Committee, said mitigating foreclosures was a key to righting the economy.

He told a hearing on the issue that Bank of America, JPMorgan Chase and other big banks have recently adopted good programs to modify loans that they own and thereby help homeowners.

But loans that remain with lenders are easier to modify than those that have been sliced and diced into mortgage-backed securities that have been sold to multiple parties.

"We have not seen servicers participating in any significant way. I believe we now have a situation that requires legislation. We are getting some progress where the loans are owned in a definable way ...

"But where we have servicers administering the securities we apparently have a problem," Frank said.

The issue results from the debt securitization process at the core of many of the financial system's problems. Under this process, lenders issue mortgages and then transfer them to Wall Street specialists that bundle and sell them as securities to pension funds, hedge funds and government housing agencies.

The investors hire mortgage servicing companies under contract to collect payments and otherwise ensure the mortgages underlying the securities maximize investors' returns.

PACTS CAN BAR MODIFICATIONS

Under the legal agreements known as pooling and servicing contracts, servicers can be discouraged or even barred from modifying loans if it would reduce returns. Doing such modifications can invite lawsuits.

The result has been fewer modifications, and that is contributing to an "ever widening gap between what ought to happen and what is happening" on mitigating foreclosures, said Pennsylvania Democratic Rep. Paul Kanjorski at the hearing.

Bank of America, the largest home lender in America, does business as both a servicer and a lender in its own right. Last month it announced a program to help hundreds of thousands of borrowers whose mortgages are owned by the bank.

The bank has "broad flexibility to modify the loans" that it holds for investment itself, said Michael Gross, managing director of loan administration loss mitigation at Bank of America and a witness at the hearing.