Baltimore-based T. Rowe Price seeks second mortgage guidelines
Daily Record, The (Baltimore), May 11, 2009 by Robbie Whelan
As national lawmakers struggle to pass a bill that addresses the needs of homeowners who are “underwater,” or stuck with mortgages worth more than the value of their houses, a prominent local financial institution has made its voice clear on the issue.
Late last month, an official at T. Rowe Price, the Baltimore- based asset management firm, sent a letter to members of the U.S. Senate’s judiciary and banking committees and the House Financial Services Committee, urging them to rethink the Obama administration’s Home Affordable Modification Plan, which would help millions of homeowners stuck paying mortgages that dwarf their sinking home values.
At issue was the order in which loan modifications address different types of mortgages.
When a home buyer purchases a house, he typically signs a low- risk, low-interest first mortgage to pay for it. But many homeowners also take out second mortgages on their homes to pay for improvements or other expenses.
These loans carry higher interest rates and higher risk, and are often known as “junior” mortgages to their more “senior” counterparts, the first mortgages.
The T. Rowe Price letter expressed concern that unless the president’s loan modification plan had language specifically dealing with these high-risk second mortgages, it would be ineffective at preventing foreclosures and would shift losses to the holders of securitized second loans.
“Failure to modify junior liens, which typically carry even higher interest rates than first lien loans, risks diminishing the effectiveness of the modification program and also ignores a fundamental principle of the credit and financial markets by not respecting the priority of the liens,” the letter said. “More specifically, from a priority of payment standpoint, second lien loans need to continue to be treated as subordinated mortgage debt and should be the first to absorb any losses due to reduction in cash flow from the borrower.”
In other words, the letter suggests that any plan that modifies only first mortgages will not solve the foreclosure crisis, and that higher-risk loans should be addressed before more manageable ones.
On Wednesday, the Senate voted 91-5 to pass the bill that outlines the loan relief program, sending it back to the House to evaluate the changes in the latest version. Included is a provision to give loan servicers who agree to modify troublesome loans a “safe harbor” from lawsuits brought by their investors and bond-holders over losses.
“The bill that the Senate passed … allows servicers safe harbor as long as they follow the guidelines laid out by the Obama administration,” said Andrew McCormick, T. Rowe Price’s head of securitized products, on Friday.
“Its not that we [agree] there should be a safe harbor but rather that we accept that the country is moving down that path,” he continued
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