Number: RL34386
Title: Could Securitization Obstruct Voluntary Loan Modifications and Payment Freezes?
Authors: Edward Vincent Murphy, Government and Finance Division 
Abstract: Securitization is the process by which a group of similar assets, such as mortgages, is transformed into marketable securities. Securitization could present a challenge for loan servicers who anticipate that the average default rate will rise among a group of borrowers who are current on their mortgages, but who face a large payment reset due to the expiration of an introductory adjustable rate mortgage (ARM) or interest-only (I/O) period. The loan servicers may be willing to modify these loans, for example, freeze the introductory payment, and avoid the costs of foreclosure, but securitization may carry the risk of costly litigation even if the servicers ultimately expect to win the lawsuits. Although loan servicers often have discretion to modify loans for borrowers already delinquent, industry standards create a fact-sensitive net-present-value (NPV) test for modifying large groups of loans in anticipation of defaults due to higher reset payments.
Pages: 7
Date: February 21, 2008