US mortgage bill seen fostering abuse, shams-report

NEW YORK, April 29 (Reuters) - U.S. legislation to speed modifications of risky home loans will only hand mortgage servicing companies more power to improve their own positions at investors’ expense, Amherst Securities Group said in a report late on Tuesday.

The bill to give mortgage servicers more leeway to lower loan payments, as approved by the U.S. House of Representatives, has a controversial “safe-harbor” provision that shields the companies from lawsuits if they break contracts that govern bonds. Servicers, under fire for failing to fix bad loans fast enough, have complained that the risk of litigation has kept them from modifying more loans. Lawmakers have been pushing for loan modifications as a key method to halt soaring foreclosures.

But investors, who see litigation as their last line of defense against abuses by servicers, have been stepping up a fight against the bill. Examples of flagrant abuse by servicers, even without safe-harbor protection, should motivate investors, said Amherst analysts, led by widely-followed veteran Laurie Goodman.

The risk of litigation “is the only force that keeps servicer behavior in check,” the analysts wrote. “It must be preserved. Servicer safe-harbor is a terrible idea.”

Looking at one subprime issue, Amherst found the servicer modified 498 loans in March and April, with 492 of them being “sham-mods” that increased the loan balance by merely pushing missed payments into the revised terms.

Such modifications benefit servicers, which recapture the principal and interest they must forward to investors during the delinquency, according to Amherst. Payments to servicers are taken from the bond trust, leaving the investor worse off.

Homeowners are unlikely to benefit. Re-defaults top 70 percent of the modified balance five months after those types of modifications are completed, according to Loan Performance and Amherst data.

In another example, Amherst asserted that one servicer modified loans that were “destined to fail” in order to preserve a payment stream to the riskiest portion of a bond that it probably owned.

Servicers under the legislation would have to demonstrate that a modification would result in the best possible value of the underlying loans. But they are also free to select data that will provide the results they desire, Amherst said. (Reporting by Al Yoon; Editing by Padraic Cassidy)