On May 21, President Barack Obama signed the Helping Families Save Their Homes Act into law (P.L. 111-22), including the controversial “Servicer Safe Harbor” provision that relieves servicers of their contractual liabilities for modifying loans without investor approval. The House had passed the Senate’s version of the bill on May 19 by a 367-54 margin, paving the way for the legislation to be forwarded to the President for signing.
Though the final version of the Servicer Safe Harbor is slightly more watered-down than the original version proposed in the House, the legislation still operates to undermine mortgage securities investors’ important contract rights and relieve from liability the very entities (the lenders who originated the loans, sold the loans off into securitizations and continued to receive fees for servicing the loans on behalf of the investors) who were often most culpable for creating the toxic securities that have been freezing up our credit markets for over a year.
You can view the full text of the law here, but the following are the key excepts from the final version of the Servicer Safe Harbor:
SEC. 201. SERVICER SAFE HARBOR FOR MORTGAGE LOAN MODIFICATIONS.
(b) Safe Harbor- Section 129A of the Truth in Lending Act (15 U.S.C. 1639a) is amended to read as follows:
`SEC. 129. DUTY OF SERVICERS OF RESIDENTIAL MORTGAGES.
`(a) In General- Notwithstanding any other provision of law, whenever a servicer of residential mortgages agrees to enter into a qualified loss mitigation plan with respect to 1 or more residential mortgages originated before the date of enactment of the Helping Families Save Their Homes Act of 2009, including
mortgages held in a securitization or other investment vehicle–
`(1) to the extent that the servicer owes a duty to investors or other parties to maximize the net present value of such mortgages, the duty shall be construed to apply to all such investors and parties, and not to any individual party or group of parties; and
`(2) the servicer shall be deemed to have satisfied the duty set forth in paragraph (1) if, before December 31, 2012, the servicer implements a qualified loss mitigation plan that meets the following criteria:
`(A) Default on the payment of such mortgage has occurred, is imminent, or is reasonably foreseeable, as such terms are defined by guidelines issued by the Secretary of the Treasury or his designee under the Emergency Economic Stabilization Act of 2008.
`(B) The mortgagor occupies the property securing the mortgage as his or her principal residence.
`(C) The servicer reasonably determined, consistent with the guidelines issued by the Secretary of the Treasury or his designee, that the application of such qualified loss mitigation plan to a mortgage or class of mortgages will likely provide an anticipated recovery on the outstanding principal mortgage debt that will exceed the anticipated recovery through foreclosures.
`(b) No Liability- A servicer that is deemed to be acting in the best interests of all investors or other parties under this section shall not be liable to any party who is owed a duty under subsection (a)(1), and shall not be subject to any injunction, stay, or other equitable relief to such party, based solely upon the implementation by the servicer of a qualified loss mitigation plan.
`(g) Rule of Construction- No provision of subsection (b) or (d) shall be construed as affecting the liability of any servicer or person as described in subsection (d) for actual fraud in the origination or servicing of a loan or in the implementation of a qualified loss mitigation plan, or for the violation of a State or Federal law, including laws regulating the origination of mortgage loans, commonly referred to as predatory lending laws.’ (emphasis added)
While this language does not provide servicers the sweeping relief from liability featured in the original House version of this bill (H.R. 1106), this safe harbor provision certainly muddies the waters as to whether investors can force servicers to repurchase loans they modify without showing that the expected net present value (NPV) from modification exceeds the expected NPV from foreclosure. Instead, it allows servicers to “reasonably determine” on their own when the anticipated recovery from modification will “likely” exceed the anticipated recovery from foreclosure, irrespective of any NPV analysis. This could create a significant misalignment of incentives where the servicers decide to modify a first-lien mortgage while protecting the second-lien mortgage they’ve retained on their books.
Most importantly, the bill does little to recognize that servicers were often the same entities that lent irresponsibly to borrowers who could not afford to pay back the loans, and should be held culpable rather than given safe harbor (let alone paid to breach their contractual obligations). As the ABS Investor Advocate points out, the saving grace of the Servicer Safe Harbor provision is the language that the servicer may not be held liable “based solely upon the implementation by the servicer of a qualified loss mitigation plan” combined with the “Rule of Construction” protecting investors’ rights to pursue repurchases if the servicer violated a predatory lending law or originated a loan in a fraudulent manor. Though it should be a given that a servicer can’t be relieved from liability for fraud and predatory lending by modifying the loan, the fact that this language was inserted only after the first version of the bill passed the House shows how slow legislators have been to recognize the role that servicers played in engendering the mortgage crisis.
Still, the bill is silent as to whether servicers may continue to be held liable or forced to repurchase loans that they originated negligently, a much more common issue with a much lower threshold of proof. During the housing boom, lenders often looked the other way and ignored red flags regarding the legitimacy of borrower statements or their ability to pay back loans, in direct conflict with their representations and warranties that they would follow definite and precise guidelines ensuring sound underwriting. If investors are no longer able to enforce their contract rights to put such loans back to the lenders whose irresponsible lending helped to create this crisis, this bill would create an injustice of vast proportions.