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Compliance Corner: Fourth Quarter 2007

FRS Alert: Federal and State Banking Regulators' Statement on Loss Mitigation Strategies for Servicers of Securitized Residential Mortgages

On September 5, 2007, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, the National Credit Union Administration, and the Conference of State Bank Supervisors (CSBS) issued a Statement on Loss Mitigation Strategies for Servicers of Residential Mortgages. The statement encourages federally regulated and state supervised institutions that service residential mortgages (servicers) to pursue strategies that mitigate losses while preserving homeownership to the possible and appropriate extent.

The federal agencies previously issued statements encouraging the institutions they supervise to work with delinquent mortgage borrowers to avoid foreclosure. However, the prior statements did not address the special issues that arise for servicers of securitized mortgage loans. When a bank originates a loan and holds it in its portfolio, it has complete discretion to perform a loan workout with the borrower to avoid default. But with securitization, mortgage loans are pooled together and transferred to a trust. Servicing for these securitized loans is governed by the terms of a contract document, typically referred to as a Pooling and Servicing Agreement. Such an agreement will specify the circumstances under which delinquent mortgages can be restructured and the types of restructurings that are permissible. The agencies encourage financial institutions to take the following steps when they identify a loan at risk for default:

  • Proactively identify borrowers at heightened risk of delinquency or default, such as those with impending interest rate resets
  • Contact borrowers to assess their ability to repay
  • Assess whether there is a reasonable basis to conclude that default is "reasonably foreseeable"
  • Explore, when appropriate, a loss mitigation strategy that avoids foreclosure or other actions that result in a loss of homeownership

The full statement is available online.External Link

The views expressed in this article are those of the author and are not necessarily those of this Reserve Bank or the Federal Reserve System.