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Senate Approves Safe Harbor Mortgage Modification; Property Rights? What’s That?

Posted by Larry Doyle on May 6, 2009 3:55 PM |

The assault on property rights continues as the Senate just passed the Safe Harbor Mortgage Modification legislation. Recall how I wrote the other day in Mortgage Magic or Mortgage Mayhem that this legislation would protect mortgage servicers from suit by mortgage investors.

Why would investors sue servicers? Servicers are charged with processing monthly principal and interest payments of mortgages and distributing the cash flow to investors. If they do not perform, then to this point they would and should be sued. Investors have the right to those payments for which they committed their funds.

The Safe Harbor Mortgage Modification legislation will protect servicers from lawsuits in the cases where mortgages have been modified and investors’ interests supposedly remain protected. One would think that covers all the bases. As I highlighted, however, the legislation may very well promote self-dealing amongst a number of the larger banks which both service mortgages and hold second mortgages.

From Bloomberg’s article, Senate Defeats TARP Measures To Move Safe-Harbor Bill:

The Mortgage Bankers Association and consumer advocates have endorsed the safe-harbor provision to protect mortgage servicing companies from being sued by mortgage-bond investors if they modify loans in accordance with President Barack Obama’s Making Home Affordable anti-foreclosure program.

“Safe harbor is something that you want as a servicer,” said Ajay Rajadhyaksha, the head of fixed-income strategy at Barclays Capital in New York. “Without the safe harbor, you’re far more skittish about doing anything.”

Corker said in a speech on the floor that the measure is a boon to larger servicers including JPMorgan Chase & Co., Citigroup Inc., Wells Fargo & Co. and Bank of America Corp. An amendment Corker sponsored that would have required borrowers to seek other forms of aid before their loans could be modified failed.

Mortgage bond buyers including Clayton DeGiacinto of Tower Research Capital in New York said allowing the safe harbor provisions removes any accountability servicers have to minimize investor losses and may make the process more susceptible to political pressure and more costly for borrowers.

“It ultimately makes bond investors skeptical and adds an additional layer of risk that will need to be priced into the securities,” said DeGiacinto, who manages a distressed mortgage fund. 

I am all for credible and equitable legislation which promotes decreasing foreclosures. In the process, however, the legislation should be airtight in making sure there is no self-dealing and conflicts of interest. That question regarding this legislation remains outstanding.

While this legislation may help limit foreclosures in the near term, the real cost may be borne in the years ahead in the form of higher mortgage rates. Why might that happen? If banks which service mortgages are influenced and incentivized not to protect the investors’ property rights and thus don’t, the investors will sell their holdings, and take their bat and ball to another field.


  • TeakWoodKite

    and take their bat and ball to another field.

    Field Of Dreams

  • S Hudgins

    I have been in the mortgage banking business for almost 37 yrs – the servicing side of the business – AND I HAVE NEVER SEEN THE BUSINESS THIS BAD! It might not be the servicer’s fault that the loans are bad – but do feel that the ‘investor’ should be protected – will the servicer be allowed to ‘sue’ the originator – someone needs to pay for this ‘mess’ we are in. It truly saddens me as to what has happened to my occupational field.

  • cynthia

    Is this in regard to the
    Safe Harbor Mortgage co.? I am
    considering refinancing with
    them. Need to know. Thanks,

    • Larry Doyle


      I would assume you are looking to work with one specific mortgage company, that being Safe Harbor Mortgage. My commentary from last May addresses a specific piece of legislation that addresses the roles and responsibilities of ALL mortgage servicers, that is the companies that collect and process monthly mortgage payments.

      I hope that makes sense. Best of luck with your refinancing.

  • Joseph Tronoski

    Isn’t it amazing that these 4 large banks names keep turning up in the news when we speak about mortgages. Isn’t amazing that the politicians are always writing laws to protect these banks. Kind of makes you wonder about the relationships between these banks and the politicians, doesn’t it. The politicans politized the mortgage process and feel on their faces again. If the was ever a time that we need term limits it is now. The politicians screw it up and not have the country in temoil trying to cover it up at the expense to the consumers. THe people writing the new rules so this never happens again are the politicians and the FED and who does the FED protect. It is also time for the Treasury to get a set of balls and do away withy the FED.

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