WASHINGTON U.S. Senator Charles Schumer has asked the big accounting firms what steps they are taking to inform investors holding securitized mortgage assets that they can modify home loans and refinance them, according to a letter obtained by Reuters on Friday.
"One of the most promising solutions to the anticipated foreclosure crisis is the voluntary modification by lenders of existing unsustainable subprime loans," the New York Democrat said in a letter to the heads of Deloitte and Touche USA, Ernst & Young, KPMG and PricewaterhouseCoopers.
In July Securities and Exchange Commission Chairman Christopher Cox said mortgage servicers may modify individual mortgage loans when a default is reasonably foreseeable without breaking accounting rules.
Cox was responding to congressional inquiries seeking clarification on the rule known as "FAS 140," which governs the accounting for asset-backed securitized products like mortgage-backed securities.
At issue was whether a bank could modify a mortgage when it is part of a pool of securities without violating the accounting rule that allows banks to keep the mortgage-backed securities off their balance sheets.
Subprime loans, made to borrowers with poor and nontraditional credit histories, have wreaked havoc in the mortgage market as higher interest rates have led to rising defaults and delinquencies among borrowers.
So the lawmakers asked in June if the loans could be modified when a default was reasonably foreseeable, instead of forcing financial institutions to wait at least 30 days after a default or until the start of the foreclosure process.
Schumer said even though the SEC ruled in July and the Financial Accounting Standards Board (FASB), the U.S. accounting rule maker, reached a similar conclusion at an education forum in June, some investors are still citing the rule as a reason to avoid acting.
"To that end, I would like to know what steps you are taking to ensure that your clients are aware of this guidance," wrote Schumer, who said he hoped that the accounting firms were encouraging their clients to modify subprime loans at risk of default.
(Reporting by John Poirier)