Senator Schumer Sends Letter to the Big 4 to Push Loan Modifications

[Moe Bedard]

One month ago the Securities and Exchange Commission chairman Christopher Cox made an important announcement in regards to accounting for mortgages where a loan modification has taken place. He said that they would not incur adverse accounting for lenders to modify securitized loans when a default seems likely.

Sen. Charles Schumer is encouraging the Big Four accounting firms to ensure their clients are aware of the option.

Here is some recent article excerpts on CFO.com from Sarah Johnson:

Schumer sent the largest firms a letter last week asking them to "assist this country's mortgage crisis by ensuring that your clients are aware of the recent SEC and FASB guidance on FAS 140, and by otherwise encouraging them to modify subprime loans at risk of default." Currently, according to Schumer, investors of securitized mortgages are still saying they are unable to refinance or modify loans because it would interfere with their off-balance sheet treatment of the loans. That has given mortgage borrowers on the brink of foreclosure little or no wiggle room to refinance their loans
It seems like the July 26th announcement by the SEC has fallen on deaf ears. Here we are a month later and it seems like ther has been no progress by some lenders to adapt and change in regards to loan modifications.

However, prompted by queries from congressmen concerned about the burgeoning subprime mortgage meltdown earlier this year, Cox implied that the lenders could indeed make modifications without a change to their balance sheet — as long as the likelihood of default is "reasonably foreseeable." Cox's letter said that "modifications undertaken when loan default is reasonably foreseeable should be consistent with the nature of modification activities that would have been permitted if a default had occurred."

This is great news for troubled borrowers but lenders and servicers need to all get on the same page.

Schumer considers this clarification from the SEC a "promising solution" to the repercussions he believes will arise when more subprime borrowers foreclose on their mortgages in the coming months. To stave off a further crisis in the mortgage industry, Schumer says, lenders could apply the new interpretation of FAS 140 and refinance the loans of subprime borrowers — those with a weak or nonexistent credit history.

But it may be up to the accounting firms to let, or remind, those lenders that they have this possibility. In his letter, Schumer urges the accounting firms to tell him what they are doing to make sure their clients know about the newly realized flexibility of FAS 140 and to "make it a priority" to do so.

You would think that all lenders would make this a priority to work with their accounting firms and adopt clear and concise plans and rules in regards to the loan modification issues that need to be addressed. But this seems to be a slow process and I think someone needs to really light a fire under their you know what , so they can move a lot faster!

What do you think?