On Tuesday, the U.S. Senate rejected a measure that would have limited the “Servicer Safe Harbor” provision of the “Helping Families Save Their Homes Act,” which aims to protect servicers from lawsuits over their modifications of residential mortgage loans. The amendment to narrow the safe harbor, sponsored by Senator Bob Corker (R-TN), was defeated by a margin of 63 to 31.
The defeated amendment would have provided some mortgage bondholders, such as Bill Frey, the right to sue mortgage servicers if they lowered a borrower’s monthly payments in violation of servicers‘ contract obligations. As discussed in prior posts, the largest mortgage servicers are banks that were often responsible for originating these predatory or unsound loans in the first place, but which sold the loans into securitizations and maintain only servicing rights as to these loans. As servicers, these entities receive a fee for interfacing with borrowers and collecting payments, and they have contractual obligations to maximize returns for securities holders. Instead, servicers are being pressured (and have other financial incentives) to modify mortgages to help keep borrowers in their homes, a campaign that would cost investors billions.
But the news is not all bad for bondholders who are attempting to force servicers to bear the costs of their irresponsible lending. A number of major media outlets, including the Wall Street Journal, have now picked up this story thanks to recent lobbying efforts by Frey and others in Washington. As the Journal article shows, congressmen and the news media are beginning to understand that helping servicers at the expense of bondholders is not only inequitable and bad for future investment in the United States, but it might even run afoul of the Fifth Amendment’s Takings Clause.
