[Congressional Record Volume 154, Number 65 (Wednesday, April 23, 2008)]
[Senate]
[Pages S3306-S3307]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. SPECTER:
  S. 2901. A bill to encourage residential mortgage loan modifications 
and workout plans, and for other purposes; to the Committee on Banking, 
Housing, and Urban Affairs.
  Mr. SPECTER. Mr. President, I have sought recognition to introduce a 
bill to give mortgage servicers an incentive to work out new loan terms 
with struggling homeowners who are falling behind in their mortgage 
payments. It is possible to avoid foreclosure in some cases by 
reworking the payment terms on mortgages. Investors, however, would 
have to accept a smaller return on their investment than they otherwise 
may have expected. As a result, businesses that service mortgage loans 
may fear litigation from investors who are the direct or indirect 
holders of those mortgages. This concern may be slowing the pace of or 
stopping loan modifications. In testimony on December 6, 2007, before 
the House Committee on Financial Services, Mark Pearce, speaking on 
behalf of the Conference of State Bank Supervisors, testified that at a 
meeting with the top 20 subprime servicers ``many of them brought up 
fear of investor lawsuits'' as a hurdle to voluntary loan modification 
efforts.
  The loan servicers have a legal duty to the investors to maximize the 
return on their investments. But in light of the current and changing 
economic environment, and the new and complex financial vehicles that 
hold mortgages, this ``duty'' is not simple or clear. This bill 
clarifies matters by stating that, absent contract provisions to the 
contrary, the duty is owed to the investor group as a whole, and not to 
individual investors or classes of investors. In addition, the bill 
clarifies that the servicer satisfies that duty by ensuring that the 
return from a mortgage, as modified, exceeds the return that would be 
expected from foreclosure. This may include agreeing to mortgage 
modifications or workout plans when a homeowner is in payment default, 
or when default or foreclosure appears imminent. Although some 
investors may get a smaller return than they may have expected, in the 
long run, taking these actions will be in the best interest of all 
investors.

  This bill is not a bailout. The bill honors contract provisions that 
may be contrary to provisions in the bill. This bill would not solve 
all of the problems we face today, but it is an important step in 
removing barriers that may slow progress as we work to solve the home 
mortgage crisis.
  This bill is necessary because regulation has not kept pace with 
innovation. Years ago, a homeowner would obtain a mortgage from a local 
bank. If he couldn't make the mortgage payment, the bank often would be 
willing and able to offer a workout, modifying the loan's terms to make 
it affordable. The bank would do this because whatever amount the 
borrower could pay would be worth more to the bank than foreclosure. 
Foreclosure has its costs, sometimes as much as half the value of the 
mortgage, and banks did not want to have to resell the home, so the 
calculation was often simple. Today, however, many mortgages are often 
bundled together with others mortgages and are sold to investment 
banks, who in turn slice and dice the bundles to produce securities 
that are rated by rating agencies and sold to investors all over the 
world.
  Investment banks that issue securities backed by mortgages typically 
divide the securities into tranches, with some tranches having claims 
that are senior to other more junior tranches. None of this, of course, 
is transparent to the homeowner, and servicers face a complex 
situation. Servicers should not have to first determine precisely how a 
loan modification will affect the various tranches of investors and 
then make choices among the groups. If the servicer reasonably believes 
that a modification increases the net present value of the investment 
as a whole, it should be able to agree to the modification.
  This month, Federal Reserve Chairman Ben Bernanke encouraged the 
nation's bankers to write down the principle on millions of mortgages. 
He said banks have not made nearly enough modifications to stop 
foreclosures. But there has been some progress. Treasury Secretary 
Paulson reported this month that ``since July more than one million 
struggling homeowners received a workout--either a loan modification or 
a repayment plan that helped them avoid foreclosure.'' In January 
alone, there were 167,000 such modifications, with the number of 
borrowers receiving help rising faster than the number of foreclosures. 
Congress needs to ensure that these modifications continue, and that 
they continue at a rapid pace.
  We are faced with a crisis caused by mortgage brokers who pushed 
risky loans on homeowners, homeowners who assumed the value of their 
home would always increase, conflicts of interest at credit rating 
agencies, bond underwriters who loosened standards, lax regulators, and 
financial institutions that ignored the risks in the instruments they 
were buying and selling. There is plenty of blame to go around

[[Page S3307]]

but Congress must now take steps to prevent similar problems in the 
future. Right now, we must do what we can to keep families in their 
homes by encouraging the companies that service mortgages to modify 
mortgages where it will prevent foreclosure. This bill will encourage 
servicers to make such modifications and I urge my colleagues to 
support it.
  Mr. President, I ask unanimous consent that the text of the bill be 
printed in the Record.
  There being no objection, the text of the bill was ordered to be 
printed in the Record, as follows:

                                S. 2901

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. SHORT TITLE.

       This Act may be cited as the ``Encouraging Mortgage 
     Modifications Act of 2008''.

     SEC. 2. FINDINGS.

       Congress finds that--
       (1) mortgage modifications often afford the best 
     opportunity to avoid foreclosures and provide long term, 
     sustainable solutions for American homeowners;
       (2) reaching mortgage modification agreements with 
     homeowners has been unacceptably slow and foreclosure rates 
     continue to rise, with the number of homeowners forced into 
     foreclosure double the number who receive modifications or 
     repayment plans;
       (3) servicers have an obligation to protect the interests 
     of investors when determining whether to offer a modification 
     or repayment plan;
       (4) the best course of action for the investor pool as a 
     whole may disadvantage the interests of individual classes of 
     investors;
       (5) servicers have expressed concern that investor classes 
     that are disproportionately disadvantaged by a modification 
     or repayment plan may seek to hold the servicer liable;
       (6) without liability protection, many servicers will not 
     be willing to take on the risk associated with approving a 
     mortgage modification or repayment plan, and instead, they 
     will eventually pursue foreclosure even though foreclosure 
     costs can equal 50 percent or more of mortgage value; and
       (7) the net present value of a modified mortgage loan will 
     almost always exceed the amount recouped by allowing the home 
     to go into foreclosure.

     SEC. 3. LEGAL SAFE HARBOR FOR ENTERING INTO CERTAIN LOAN 
                   MODIFICATIONS OR WORKOUT PLANS.

       Section 6 of the Real Estate Settlement Procedures Act of 
     1974 (12 U.S.C. 2605) is amended--
       (1) by redesignating subsections (i) and (j) as subsections 
     (j) and (k), respectively; and
       (2) by inserting after subsection (h) the following:
       ``(i) Duty of Servicers Regarding Certain Loan 
     Modifications or Workout Plans.--
       ``(1) In general.--Notwithstanding any other provision of 
     law, absent specific contractual provisions to the contrary, 
     a servicer of pooled qualified residential mortgages--
       ``(A) owes any duty to determine if the net present value 
     of the payments on the loan, as modified, is likely to be 
     greater than the anticipated net recovery that would result 
     from foreclosure to all investors and parties having a direct 
     or indirect interest in the pooled loans or securitization 
     vehicle, but not to any individual party or group of parties; 
     and
       ``(B) acts in the best interests of all such investors and 
     parties, if the servicer agrees to or implements a qualified 
     loan modification or workout plan for a qualified residential 
     mortgage, or if, and only if, such efforts are unsuccessful 
     or infeasible, takes other reasonable loss mitigation 
     actions, including accepting partial payments or short sale 
     of the property; and
       ``(C) if the servicer acts in a manner consistent with the 
     duty set forth in subparagraphs (A) and (B), shall not be 
     liable under any law or regulation of the United States, any 
     State or any political subdivision of any State, for entering 
     into a qualified loan modification or workout plan in any 
     action filed by or on behalf of any person--
       ``(i) based on the person's ownership of any interest in a 
     residential mortgage, a pool of residential mortgage loans, 
     or a securitization vehicle, that distributes payments out of 
     the principal, interest, or other payment on loans in the 
     pool;
       ``(ii) based on the person's obligation to make payments 
     determined in reference to any loan or interest referred to 
     in clause (i); or
       ``(iii) based on the person's obligation to insure any loan 
     or any interest referred to in clause (i).
       ``(2) Definitions.--As used in this subsection--
       ``(A) the term `qualified loan modification or workout 
     plan' means a contract, modification, or plan relating to a 
     qualified residential mortgage loan consummated on or after 
     January 1, 2004, with respect to which--
       ``(i) payment default on the loan or loans has occurred, is 
     imminent, or is reasonably foreseeable;
       ``(ii) the dwelling securing the loan or loans is the 
     primary residence of the owner;
       ``(iii) the servicer reasonably believes that the 
     anticipated recovery under the loan modification or workout 
     plan will exceed the anticipated recovery through 
     foreclosure, on a net present value basis;
       ``(iv) the effective period runs for at least 5 years from 
     the date of adoption of the plan, or until the borrower sells 
     or refinances the property, if that occurs earlier; and
       ``(v) the borrower is not required to pay additional fees 
     to the servicer;
       ``(B) the term `qualified residential mortgage' means a 
     consumer credit transaction or loan that is secured by the 
     consumer's principal dwelling;
       ``(C) the term `securitization vehicle' means a trust, 
     corporation, partnership, limited liability entity, special 
     purpose entity, or other structure that is the issuer, or is 
     created by the issuer, of mortgage pass-through certificates, 
     participation certificates, mortgage-backed securities, or 
     other similar securities backed by a pool of assets that 
     includes residential mortgage loans; and
       ``(D) the term `servicer'--
       ``(i) means the person responsible for servicing of a loan 
     (including the person who makes or holds a loan, if such 
     person also services the loan); and
       ``(ii) includes the entities listed in subparagraphs (A) 
     and (B) of subsection (j)(2).
       ``(3) Effective period.--This subsection shall apply only 
     with respect to qualified loan modification or workout plans 
     initiated during the 6-month period beginning on the date of 
     enactment of this subsection.
       ``(4) Rule of construction.--Nothing in this subsection may 
     be construed to limit the ability of a servicer to enter into 
     a loan modification or workout plan other than a qualified 
     loan modification or workout plan covered by this 
     subsection.''.
                                 ______