The document summarizes key points from a proposed 27-page mortgage reform term sheet between state attorneys general and federal regulators. The term sheet aims to overhaul mortgage servicing procedures and covers the entire foreclosure process, borrower interactions, and loan modifications. Key requirements for servicers include thoroughly evaluating borrowers for all loss mitigation options before foreclosure; offering loan modifications when they result in higher value than foreclosure; prohibiting foreclosure or bankruptcy relief filings while a modification evaluation or application is pending; establishing borrower communication procedures; and complying with servicemember protections. The term sheet comes after a HUD report cited systemic problems with lenders not properly verifying income or obligations for FHA loans.
Trends and Developments in M&A (Part I): Public Company Targets
Proposed Mortgage Reform
1. Financial Bulletin
Regulations and developments affecting the financial services industry March 9, 2011
Proposed mortgage reform:
What servicers need to know
Last Thursday, the state attorneys general • Loss mitigation requirements — test. If the test is positive, the servicer
and federal regulators submitted a Mortgage servicers would be required must send the results to the trustee
27-page term sheet to the country’s five to thoroughly evaluate borrowers for or other authorized parties to obtain
largest banks that outlines proposed all available loss mitigation options consent for the modification.
requirements to overhaul mortgage before foreclosing. Servicers would Servicers are also encouraged to
servicing procedures. The term sheet have to offer and facilitate loan consider principal reduction as
covers the entire foreclosure process, modifications instead of foreclosing an option whenever possible.
interactions with borrowers, loan when the loan modifications result in Servicers would also have to evaluate
modifications and more. Negotiations a higher net present value (NPV) than delinquent loans with loan-to-value
between the institutions and regulators foreclosure. If a borrower requests ratios of more than 100 percent and
will continue over the next few months. a loan modification and the servicer offer a principal reduction if it would
Here are some key points from the believes that a pooling and servicing result in a better NPV than a standard
term sheet and their implications for agreement prohibits one, the servicer modification.
mortgage servicers. would still have to perform the NPV continued>
• Foreclosure and bankruptcy
information and documentation —
In states where foreclosure affidavits
are not required, mortgage servicers
would be required to provide
borrowers with a sworn statement that
includes facts supporting the servicer’s
right to foreclose on the borrower. This
statement would serve as a first notice
to the borrower. These rules would also
apply to bankruptcy proceedings.