WASHINGTON — Frustrated by the slow pace of loan modifications, House Financial Services Committee Chairman Barney Frank said Wednesday that he is considering overhauling the servicing system to speed up the process.
The Massachusetts Democrat provided few details on how he would do so, but said it was clear servicers need more authority to modify loans on behalf of investors.
"The servicer does not have the power to act as much as the owner" of the loan does, Rep. Frank said. "It's not good public policy to have the power to make important economic decisions split up."
During a hearing on a new government program to help struggling homeowners, he also praised Federal Deposit Insurance Corp. Chairman Sheila Bair for making systematic loan modifications at the failed IndyMac, and said he would press servicers to follow her lead.
The FDIC may not be alone among government agencies in trying to push for changes. Ms. Bair said the government seizure of Fannie Mae and Freddie Mac will likely make the modification process faster.
"Fannie Mae and Freddie Mac also had some restrictions with their" pooling and servicing agreements "and now that they are in conservatorship they are working with us on that," she said. "There are some advantages there."
For much of the hearing, however, Rep. Frank focused on how to change the servicing system. During a question-and-answer session with Ms. Bair, he asked if the agency had encountered more difficulties in modifying loans that IndyMac serviced as opposed to ones it owned in portfolio.
Ms. Bair said the FDIC had wide latitude to rework loans in its portfolio, but that it ran into obstacles posed by pooling and servicing agreements for those mortgages it services.
"For the loans we own, our only constraint is maximizing value for the Deposit Insurance Fund," she said.
Later during the hearing, Ms. Bair noted that the FDIC has received pushback from investors on reworking some loans.
"The servicing agreements don't typically allow compensation for these workout agreements," she said. "There are skewed economic incentives."
Some servicing agreements, she said, force lenders to treat loans that are likely to default differently than those that have already entered default. In other circumstances, the agreements dictate that servicers must advance a certain amount of taxes and insurance first to investors when a loan enters default. That process, she said, could encourage servicers to move faster toward foreclosure to help them immediately recoup costs.
After IndyMac collapsed on July 11, the FDIC inherited 742,000 mortgages, including more than 60,000 that are 60 days or more past due or in foreclosure.
Ms. Bair said that in the two months since assuming control of the thrift, the FDIC has sent out 7,400 modification proposals and more than 1,200 borrowers have accepted offers that are being processed.
On average, borrowers in modification are saving $430 a month on their mortgage payment, she said.
Rep. Frank said Ms. Bair's experience running IndyMac would make her instrumental to the committee's efforts in the next Congress.
"This makes you ideally suited to work with us next year when we talk about what changes … we will be urging," he said. "You will be helpful to us as we decide what needs to be done."
Though the industry is not seeking changes to the servicing system, representatives from Bank of America Corp., Wells Fargo & Co., and Citigroup Inc. agreed that modifying loans they do not own is more challenging.
"We keep the loans we merely service separate and we see that they are more difficult to service; we see higher delinquency rates and higher foreclosure rates in that category," said Mary Coffin, the executive vice president for Wells Home Mortgage Servicing.
Lawmakers have put much of their faith in a new Federal Housing Administration program scheduled to begin operation Oct. 1 that would allow borrowers with mortgages worth more than their value of their home to refinance into a cheaper loan.
Michael Gross, Bank of America's managing director for loss mitigation, said lawmakers may be hoping for too much.
"My biggest concern is that expectations for the Hope for Homeowners program might be too high," he said.
He said servicers and lenders may prefer to use existing methods of modifying loans, which may yield a better return, then taking a required haircut to participate in the FHA program.
Despite the recent chaos in the financial markets, including the government's decision to bail out American International Group late Tuesday, lawmakers stuck mainly to the hearing's original focus on mortgage loan refinancings.
Ms. Bair did field some questions from Rep. Jeb Hensarling, R-Tex., on the depletion of the Deposit Insurance Fund.
"As I understand it, the insurance fund is at a five-year low, the number of problem banks is at a five-year high. The fund is below the reserve level set in statute, do I have my facts right?" he asked before pressing Ms. Bair on how she intends to structure premiums.
Ms. Bair said the agency plans to roll out new risk-based premium rates in October and will give cheaper premiums for institutions with positive Tier 1 capital levels and that issue subordinated debt. But it will impose higher premiums on institutions that rely heavily on secured lending or brokered deposits to fund rapid growth, she said.
"We want to provide positive incentives for them to change their risk profile," she said.
Ms. Bair is likely to face similar questions at a hearing on bank failures today in front of the Senate Banking Committee.
That hearing may also explore what steps the Bush administration and lawmakers should take to stem the growing housing crisis.
Despite the government bailout of Fannie, Freddie, and AIG, and the rescue of Bear Stearns, financial markets were under continued stress Wednesday.
Though several observers have said policymakers are considering a Resolution Trust Corp.-type entity to purchase and offload bad assets, Rep. Frank downplayed that prospect this week.
"It's an idea on the table," he said.
"We've talked about some form of greater intervention" that "would involve buying up some stuff, but it's really just an idea."
In an interview on CNBC, Sen. Richard Shelby, the No. 1 Republican on the Senate Banking Committee, said he would likely oppose such an idea but wanted more details.
The Alabama Republican also criticized the Federal Reserve Board's $85 billion bridge loan to AIG.
"You can't just give somebody a blank check and let them run with the money," he said, adding that "there have got to be some gaps in our regulation, and we need to find them."
