Safe-Harbor a Second Bailout

Legislation aimed at providing a so-called “safe harbor” for loan servicers will actually lead to more abuse and shoddy loan modifications, according to a report from Amherst Securities Group. The bill is intended to give loan servicers, including big banks like Bank of America and Citi, flexibility to modify loans without investor lawsuits.

The report also found that many of the supposed loan modifications are simple repayment plans that actually increase the monthly payments and the balance of the mortgage thus resulting in the loan servicers to collecting more fees. The report cited claims one servicer modified loans that were “destined to fail” in order to keep the servicing fee revenue.

A release from law firm Grais & Ellsworth LLP alleges that the safe harbor agreement is simply a “second bailout” for the big four banks (Bank of America, Wells Fargo, Chase and Citi Bank) . The lawyers’ claims are similar to the Amherst report. It asserts that the big banks keep principal balances high so they can take in more servicing fees instead of providing more meaningful loan modification solutions that reduce loan balances. They also argue that the servicer safe harbor will hurt American’s pensions, 401k plans, and savings that rely on the performance of these mortgages and believe such a measure will make it more difficult to obtain mortgage financing in the future as new investors steer clear.

Grais & Ellsworth believe the main reason the banks want the safe harbor is to protect their $400 billion in second mortgages, which by law should be modified before the investor-owned first mortgages. “If the Big Four followed the law and modified their own junior mortgages first, they would lose so much money they would have to ask Congress for another bailout,” the release said.

Nearly half of loans modified in the second quarter of last year were 60 days or more past due after just eight months, mainly because many of the supposed workouts resulted in unchanged or higher monthly payments