Nov. 12 (Bloomberg) -- Legislation is needed to restructure U.S. mortgage servicing contracts to make it easier for lenders to modify loans for homeowners struggling to avoid foreclosure, House Financial Services Committee Chairman Barney Frank said.

``We have not seen servicers participate in any significant way,'' Frank, a Massachusetts Democrat, said at a hearing with mortgage executives today in Washington. ``I believe it's now a situation that requires legislation. This committee has to act by restructuring the servicing mechanism.''

Federal housing officials urged the private industry to embrace a plan announced yesterday in which government-run Fannie Mae and Freddie Mac will lower interest rates and extend loan terms for troubled borrowers. Executives from Bank of America Corp. and JPMorgan Chase & Co. today told Frank's committee that they are limited in what help they can offer by the difficulty in tracking down borrowers, revaluing properties, and by legal contracts that prohibit loan modifications.

``Investor rules and underlying servicing contracts with respect to modifications are not uniform and may prevent us from doing modifications that would benefit borrowers and investors,'' Michael Gross, the managing director of loan administration loss mitigation for Bank of America, said in written testimony.

Representative Steve LaTourette, an Ohio Republican, suggested that Congress shield mortgage servicers from legal liability if investors lose money on modified loans.

``Everybody sees the wisdom of mortgage modifications except no one talked to Wall Street,'' LaTourette said. ``If we don't do something on the liability that the fiduciaries have, we're not going to be able to modify anything.''

Lawsuit Fears

Representative Spencer Bachus of Alabama, the panel's ranking Republican, said ``fear of being sued is a powerful disincentive for mortgage servicers considering whether to modify a troubled borrower's mortgage.''

Fannie and Freddie will target borrowers who are at least 90 days delinquent and have high loan-to-income ratios, Treasury and Federal Housing Finance Agency officials said yesterday. The companies may offer homeowners reduced interest rates and longer terms of as much as 40 years to trim monthly payments to 38 percent of their gross income, a threshold of affordability.

``It's not the servicer's role to impose conditions on investors; instead our role is to fulfill our contractual obligations by working to achieve the best possible results for our investors while creating affordable payments for the borrowers,'' Molly Sheehan, a senior vice president for the home lending business at JPMorgan said in her written testimony today.

Hedge Funds

Hedge funds represented by the Managed Funds Association say they are also concerned about getting accurate appraisals on the properties facing foreclosure. Some loan modification plans include reducing the outstanding loan balance to more accurately reflect the fair market value of a home, forcing investors to take losses in some cases.

``As defaults and foreclosures have risen sharply, some servicers may be overwhelmed by the process of having to make value determinations on a case-by-case basis for so many troubled mortgages,'' Benjamin Allensworth, a lawyer for the Managed Funds Association, said in written testimony.

To contact the reporter on this story: Dawn Kopecki in Washington at dkopecki@bloomberg.net.

Last Updated: November 12, 2008 13:00 EST