Servicers Fear MBS Lawsuits.

WASHINGTON -- Fear and doubt seems to be impeding mass restructurings of problem mortgages as servicers are wary of being sued by investors holding mortgage-backed securities.

The Bush administration, federal regulators, mortgage industry leaders and consumer advocates are encouraging servicers to develop loan modification programs to stem rising foreclosures due to risky adjustable-rate mortgages.

Subprime defaults and foreclosures are already at record highs and many are concerned that a wave of resets on two million subprime ARMs over the next 18 months could really create a crisis.

"We have a huge problem on our hands. We can't just sit doing this kind of case-by-case, laborious restructuring with all these millions of subprime hybrid ARMs," FDIC chairman Sheila Bair said.

So far, it appears the portfolio lenders are taking the lead in modifying ARMs before they reset at a higher interest rate.

Some portfolio lenders are extending the existing interest rate for a full seven years from the original start date of a 2/28 or 3/28 ARM, according to MRG Document Technologies group chairman Terry King.

But servicers are aware that some investors in private-label MBS oppose the implementation of streamline loan modification programs.