Mortgage company urges plan for principal cuts

Reuters

NEW YORK (Reuters) - American Home Mortgage Servicing, one of the largest servicers of subprime mortgages, is urging the U.S. Treasury to organize a plan to boost principal reductions for up to one million homeowners by unlocking loans from securities.

The servicer is asking for amendments to contracts that govern treatment of delinquent loans in mortgage securities. Currently, most contracts don't allow sales of loans prior to foreclosure, and in many cases don't permit a servicer to lower principal when a loan is modified.

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American Home contends its proposal could provide a boost to the Obama administration's Home Affordable Modification Program, in which many borrowers failed to qualify for lower mortgage payments because a principal reduction would be needed, but not possible if a loan was tied up in a bond.

The plan's authors include James Lockhart, a former top U.S. housing finance regulator and currently vice chairman at WL Ross & Co, the owner of American Home Mortgage.

There are about $1.25 trillion in loans contained in the so-called private-label mortgage securities packaged by Wall Street during the housing boom. The distressed balance is nearly $400 billion, with half of that representing loans that are both in default and underwater, American Home said.

(Reporting by Al Yoon; Editing by Padraic Cassidy)