ASF Issues Guidelines for Subprime Mortgage Loan Modifications

The American Securitization Forum (ASF) today issued a statement of principles, recommendations and guidelines for the modification of subprime residential mortgage loans that are included in a securitization.  The Statement was developed by the ASF to provide practical guidance to servicers, and to establish a common framework for the structure and interpretation of loan modification provisions included in securitization governing documents, thereby promoting greater uniformity, clarity and certainty of application of these provisions throughout the industry.

“ASF recognizes that it is an important goal to minimize foreclosure and preserve homeownership wherever possible.  Loan modifications for subprime mortgage loans that are either already in or are likely to be in default are an important servicing tool that can minimize losses to investors and help some borrowers avoid foreclosure,” said George Miller, executive director of the American Securitization Forum.  “We hope this guidance will encourage broader and more effective use of loan modifications in appropriate situations.”

The ASF’s Statement sets forth a series of loan modification recommendations which it believes represent widely-accepted industry views, based upon extensive consultation with its members and other securitization market participants.  The Statement includes an illustrative list of modifications, such as changing the interest rate on a prospective basis, forgiving principal, capitalizing arrearages, and extending the maturity date, and notes limitations that are sometimes imposed on loan modifications in securitization governing documents.

The Statement notes that servicers should be permitted and encouraged to proactively reach out to borrowers for whom default is likely in order to determine whether default is foreseeable and to explore modification possibilities, especially before the first adjustment date on a hybrid adjustable rate mortgage loan.  In addition, the Statement indicates that loan modifications should be considered on a loan-by-loan basis, taking into account the unique circumstances for each loan and borrower, including the borrower’s ability to pay.  The ASF opposes any across-the-board approach to loan modifications, any approach that would have all modifications structured in a particular manner and any proposals that would provide a universal moratorium or delay period on foreclosures.

As a general matter, ASF recommends that loan modification should only be made in a manner that is consistent with securitization governing documents; in a manner that serves the best interests of borrowers and securitization investors; where there is a reasonable basis for concluding that the borrower will be able to make scheduled payments on the loan as modified; and where the net present value of the payments on the modified loan are likely to be greater than the anticipated net recovery that would result from foreclosure.

The Statement also endorses several interpretive positions on specific issues arising in connection with loan modifications.  These include interpretations of various regulatory, tax and accounting rules; contractual provisions in securitization governing documents, and industry practice standards applicable to servicing activities generally.   Prospectively, the Statement recommends further actions including standardization of loan modification language in securitization documentation, the development of guidelines to identify and manage potential conflicts of interest in loan modification activities of servicers, and achieving greater clarity and transparency in the manner in which loan modifications are reported to investors and treated for purposes of delinquency, realized loss and other performance trigger mechanisms included in subprime mortgage securitizations.

The American Securitization Forum is a broadly-based professional forum through which participants in the U.S. securitization market can advocate their common interests on important legal, regulatory and market practice issues.  The ASF also provides information and education on a range of securitization market issues and topics through industry conferences, seminars and various other initiatives.  For more information related to the ASF, please go to www.americansecuritization.com.  The ASF is a forum of the Securities Industry and Financial Markets Association.