Servicer Challenges in Obama Administration’s Making Home Affordable Loan Modification Program

March 17, 2009

The Obama administration recently announced the Making Home Affordable Loan Modification Program. The mortgage modification program raises difficult issues and has a number of important open questions. It also includes important monetary incentives for servicers, owners and borrowers. A memorandum briefly describing the modification program is at the bottom of this page, as are Treasury’s program guidelines.

Servicers contemplating participation in the modification program will need to consider a number of unanswered questions, including the following:

  • The form of the required agreement between the servicer and Treasury has not been released. Treasury has indicated it should be available in April. Because no financial incentives will be paid to any party, including a borrower, unless and until the servicer has entered into such an agreement, a servicer should be cautious about promising such incentives to borrowers until it gets comfortable signing that agreement.

  • Documentation requirements, information collection and reporting requirements and fraud detection and control requirements that the program will impose on servicers are largely unspecified.

  • The modification program does not alter contractual servicing arrangements or offer servicers protection from liability to owners (although pending legislation, if adopted, may do so). Thus a servicer must consider whether its obligations under the program will be consistent with its obligations under servicing agreements and/or pooling and servicing agreements.

  • The incentives to servicers may raise conflicts of interest issues between the servicer and the owner in cases where the servicer is servicing loans for a third party. Pending legislation may (or may not) provide protection for servicers on this issue.

  • Numerous details affecting important calculations and required parameters and assumptions are undefined at this time.

If you have any questions, please feel free to contact any of your regular contacts at the firm or any of the partners and counsel listed under Structured Finance or Banking and Financial Institutions on this website.