What's Holding Back Mortgage Modification?

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Bank of America (BAC), which acquired Countrywide in July 2008, has not filed a response to the lawsuit. In a December statement, Bank of America noted that loan modifications have been "occurring for decades without objections or challenges, so we are especially troubled at the timing of this complaint. No one benefits if we allow these homeowners to advance toward ultimate foreclosure. We are confident any attempt to stop this program will be legally unsupportable." A motion to move the case from New York Supreme Court in Manhattan to federal court in New York is pending.

Rewriting Loans Stems Foreclosures

Despite the fear of lawsuits, some mortgage middlemen are now stepping up efforts to accelerate modification of securitized loans. At Litton Loan Servicing, which handles about $70 billion worth of mortgages, nearly one-third of troubled loan modifications in November involved a reduction in the principal balance, a step that many servicers—and major lenders—have been reluctant to take because it is often the most costly to investors compared to interest-rate freezes and extending a loan's term. Litton says its analysis shows principal reductions led to a 50% decrease in borrowers who redefault on their mortgages, according to recent reports. Litton has declined several requests for an interview from BusinessWeek.

Legislation pending in Congress would offer servicers protection from lawsuits, known as safe harbor. A Feb. 6 letter reviewed by BusinessWeek from the American Bankers Assn. to James B. Lockhart III, director of the Federal Housing Finance Administration, which oversees mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE), says the banking trade group's members plan to redouble efforts to modify securitized loans—and help negotiate with investors on behalf of servicers worried about legal liability. "This letter is going to be held up in part as a plea to investors to recognize this industry (loan modification) practice as a benefit to the overall economy," says Robert Davis, executive vice-president of the trade group. He says the ABA wants mortgage servicers to interpret contract language "liberally."

With Jane Sasseen, BusinessWeek's Washington bureau chief, and Robert Berner, a senior writer based in Chicago

Grow is a correspondent in BusinessWeek's Atlanta bureau.