Reports have surfaced that the ""FDIC"":http://www.fdic.gov/ is contemplating stricter requirements for banks that service loans and own second lien loans.[IMAGE]
New requirements would force banks to disclose what potential ramifications a loan modification on the first loan would have on the second lien loan.
A December speech by FDIC Chairman Sheila Bair states that certain principles need to be upheld in agreements between banks and investors. Among them, challenges created by second liens need to be clear.
""Since the early stages of the mortgage crisis, second liens have been an obstacle to effective alternatives to foreclosure, including loan modification and short sales,"" she said.
Industry analysts have speculated that servicers may be reluctant to modify a primary loan because the bank that services the loan also holds the title for the second lien. Such an arrangement could be considered a conflict of interest and prompts some to wonder if investors would be swayed if they knew of the arrangement beforehand.[COLUMN_BREAK]
Bair continued, ""We must tackle the second lien issue head on. One option is to require servicers to take a meaningful write-down of any second lien if a first mortgage loan is modified or approved for a short sale. All of the stakeholders must be willing to compromise if we are to find solutions to the foreclosure problem and lay the foundation for a recovery in our housing markets.""
Among other principles that new regulation is aiming to enforce on banks and servicers are risk retention standards that have been in the works for more than a year.
Some are urging regulators to create servicing regulations as a part of the risk retention standards.
Under the Dodd-Frank Act, originators could be required to retain some of the risk in securities they package.
But some feel that efforts to pass too much regulation too quickly could be detrimental to the industry.
On Monday, the ""Mortgage Bankers Association"":http://www.mbaa.org/default.htm (MBA) sent a letter to federal regulators urging them not to try to combine risk retention standards with servicing standards. The two issues are too complex not to be handled separately, the group argued.
""The idea of national servicing standards is still very much in the conceptual stage, as a host of policy implications are still unclear, including how such standards might interact with accounting and regulatory capital requirements, the legal and beneficial rights of different parties and potential effects on consumers, lenders and investors,"" the letter said. ""We urge policymakers to work with MBA and other stakeholders to ensure that these different policy dimensions are understood before rushing forward with a rulemaking.""
The deadline for new risk retention rules related to securitization of loans is April 17.