The Senate passed a version of the Helping Families Save Their Homes Act (S. 896) on Wednesday by a vote of 91-5. The bill will now go back before the House of Representatives, which can adopt it, amend it, send it back to the Senate, or convene a conference committee where both houses of Congress can work out their differences.
One major difference between the bills passed by the Senate and the House is that the version passed by the House in early March (H.R. 1106) contained a bankruptcy cram-down provision that would allow bankruptcy judges to modify principal balances of residential mortgage loans; S. 896 has no such provision.
Unfortunately, both pieces of legislation contain the short-sighted “Servicer Safe Harbor” provision that allows servicers to override their contractual obligations to bondholders to repurchase mortgages that they modify. Interestingly, this provision has been downplayed by those who supported the bill, including Senator Chris Dodd (D-CT), who sponsored the bill in the Senate. The announcement of the passage of the bill on Dodd’s website heralds the bill as providing “more tools to borrowers and banks to help prevent foreclosures” while making it “easier for homeowners and loan servicers to use those tools.” The announcement makes no mention of the Servicer Safe Harbor or the fact that it would shift losses from loan modifications from the banks who originated the loans to the bondholders who negotiated contract clauses to avoid them.
Other Senators who actually discuss the safe harbor provision don’t seem to fully understand it. For example, Senator Mel Martinez (R-FL) notes on his website that, “the safe harbor provision will be especially valuable in giving mortgage servicers the ability to modify home loans while protecting the future of the residential mortgage credit markets.” Martinez ignores the fact that servicers already have the ability to modify home loans. Indeed, James B. Lockhart, the director of the Federal Housing Finance Agency, was recently quoted in an insightful article in the Wall St. Journal as saying that servicers “can work within the present system [without lawsuit protection] and get a lot of loan modifications done.” Servicers are, however, currently incentivized to do so only when they can maximize the long-term value of the loan. Far from protecting the long term future of the residential mortgage credit markets, the Servicer Safe Harbor provision would discourage future investment in RMBS by sending a message to potential investors that their contractual safeguards can be disregarded at any moment by a stroke of the legislature’s pen.
You can track the progress of this bill as it winds its way through Congress with the new Legislation Tracker widget on the sidebar to the right.