Idea of the Day: Provide Incentives for Mortgage Restructuring

October 30, 2008

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Congress added provisions to the October financial rescue bill to require Treasury to use its new authority under the legislation to exhort servicers toward more loan restructurings, but we need to free servicers from conflicting requirements and give them an incentive to sell mortgages to Treasury for refinancing and foreclosure avoidance.

Servicers managing pools of loans for investors are generally barred by contract from selling the underlying mortgage loans, but the trust agreements also generally provide that servicers must amend the agreements if doing so would be helpful or necessary to stay in compliance with tax rules under the Real Estate Mortgage Investment Conduit statute and related laws. REMIC provides important benefits for these securitization trusts and their investors. We propose to modify the REMIC rules to ensure that servicers have the authority and incentive to sell the mortgages to Treasury.

Legislation would provide that REMIC benefits would be denied going forward if the securitization’s contract provisions have the effect of barring servicers from selling or restructuring loans under Treasury’s programs. Servicers would have a legal obligation to their investors to modify the agreements to stay in compliance. Servicers could then sell loans to Treasury for restructuring. Participation in the Treasury program would remain voluntary, but the key legal impediments to participation would be removed.

For more on this topic, please see:

• Next Steps to Resolve the Mortgage Crisis by Michael Barr