Senate bill gives freer hand to mortgage market

Senate bill gives freer hand to mortgage market
By Saskia Scholtes in New York
Copyright The Financial Times Limited 2009
Published: May 7 2009 01:28 | Last updated: May 7 2009 01:28
http://www.ft.com/cms/s/0/c7842914-3a93-11de-8a2d-00144feabdc0.html


The US Senate on Wednesday passed legislation that seeks to prop up the housing market by giving mortgage servicers freedom to modify problem home loans without fear of investor lawsuits.

The bill also revamps the Hope for Homeowners programme aimed at helping borrowers remortgage and raises the Federal Deposit Insurance Corporation’s coverage on individual bank accounts and its ability to borrow from the Treasury. It also strengthens the terms of the Troubled Asset Relief Program.

The House of Representatives has already passed its version of the legislation and the Senate tried to tailor its bill, which passed 91-5, so the two could be easily reconciled. The legislation protects servicers from lawsuits filed by mortgage bond investors when they modify loans under government anti-foreclosure initiatives.

This so-called “safe harbour” provision has been controversial because investors owning securities backed by borrower’s main mortgages say banks owning riskier second-lien mortgages could use the legislation to avoid billions of dollars of losses.

Second-lien loans are mostly owned by banks, which also own the mortgage servicers. Investors say the “safe harbour” provision could allow servicers to favour banks that own them.

Congress is trying to encourage companies that collect mortgage payments to help struggling homeowners by easing loan terms.

The legislation included a measure that would expand a government credit line for the FDIC in case its reserves prove inadequate to deal with the growing number of bank failures.

The FDIC, which guarantees bank deposits, has until now had a $30bn credit line from the US Treasury. The Senate bill approved a permanent increase in the line to $100bn and a $500bn credit limit that will expire at the end of 2010. The agency’s deposit coverage on individual bank accounts was permanently raised to $250,000 from $100,000.

The Senate also approved an amendment to allow the US Treasury to retain warrants in banks even after they repay Tarp money, enabling the government to share in any stock gains as shares recover. It also authorised audits of the Federal Reserve’s use of its emergency powers.