US regulators encourage loss-mitigation strategies

Six US regulatory agencies have called for more loss-mitigation strategies to prevent homeowner defaults on mortgages. In a joint statement released yesterday they said that all regulated financial institutions that service mortgage loans should take appropriate steps when default is “reasonably foreseeable”.

The statement also clarified that prudent actions include proactively identifying borrowers with heightened risk of delinquency or default, and contacting them before interest rate adjustments occur. It was previously subject to debate whether this action was appropriate. Dealers estimate around $220 billion of subprime adjustable-rate mortgages will reset by the end of 2007, with another $190 billion in 2008.

The six agencies were the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, the National Credit Union Administration and the Conference of State Bank Supervisors.

The regulators stated loss-mitigation strategies could include loan modifications; deferral of payments; extension of maturities; conversion of adjustable-rate mortgages into fixed-rate or fully indexed, fully amortizing adjustable-rate mortgages; a reduction of principal; capitalisation of delinquent amounts; or any combination of these.

The regulators are trying to counteract the marked increase in foreclosure filings, which have skyrocketed from 92,845 in July 2006 to 179,599 in July 2007, or a 93% increase, according to California-based data provider RealtyTrac. "Foreclosure is typically the most costly and least preferred means of resolving a defaulted mortgage loan, and serves neither the interests of borrowers nor securitisation market participants," said George Miller, executive director of the American Securitization Forum, a New York-based trade group.

See: Tranche warfare