Statement on Loss Mitigation Strategies for Servicers of Residential Mortgages
The Federal Deposit Insurance Corporation, Board of Governors of the Federal Reserve System, Office of the Comptroller of the Currency, Office of Thrift Supervision, National Credit Union Administration, and Conference of State Bank Supervisors (CSBS) encourage federally regulated institutions1 and state-supervised entities that service mortgage loans (collectively referred to as "servicers") to pursue strategies to mitigate losses while preserving homeownership to the extent possible and appropriate.
Previously, in April 2007, the federal financial agencies issued a Statement on Working with Mortgage Borrowers and followed this with the July 2007 Statement on Subprime Mortgage Lending. Both interagency statements encouraged federally regulated institutions to work constructively with residential borrowers at risk of default and to consider prudent workout arrangements that avoid unnecessary foreclosures. In these statements, the federal financial agencies stated that prudent workout arrangements that are consistent with safe and sound lending practices are generally in the long-term best interest of both the financial institution and the borrower. CSBS, the American Association of Residential Mortgage Regulators (AARMR), and the National Association of Consumer Credit Administrators developed a parallel Statement on Subprime Mortgage Lending that applies to state-supervised mortgage brokers and lenders. In June 2007, CSBS and AARMR issued a consumer alert and an industry letter to address resetting mortgage loans.
These previous statements focused on residential loans retained by federally regulated institutions and state-supervised entities. However, many subprime and other mortgage loans have been transferred into securitization trusts. Servicing for these securitized loans is governed by the terms of contract documents, typically referred to as Pooling and Servicing Agreements. A significant number of adjustable-rate mortgages are scheduled to reset in the coming months. As indicated in the Statement on Subprime Mortgage Lending and the October 2006 Interagency Guidance on Nontraditional Mortgage Product Risks, these resets may result in a significant payment shock to the borrower, which can increase the likelihood of default.
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