There are thousands of troubled mortgages in need of modification, but some think there is a conflict of interest that may be preventing large mortgage companies from voluntarily offering modification services.

Many large mortgage companies own second mortgages on the same homes that they service, but these secondary mortgages are an investment, potentially creating a conflict of interest. In hopes of eliminating this issue, House Reps. Brad Miller (D-North Carolina) and Keith Ellison (D-Minnesota), both members of the financial services committee, have introduced the Mortgage Servicing Conflict of Interest Elimination Act.

Two-thirds of all distressed mortgages are now serviced by the four largest banks — Bank of America, Wells Fargo, Chase, and Citibank. And these same banks also own about $477 in second liens.

If enacted, the new legislation would prohibit mortgage servicers from owning debt secured by a home that secures a mortgage they service.

“Servicers are required to act in the best interests of the investors who own the mortgages,” Miller said. “In many, those four banks hold interests in other debt secured by the same home that would be affected by a decision to modify the mortgage or to foreclose, placing the banks’ interests in irreconcilable conflict with the interests of investors.”

Ellison said this obvious conflict of interest between investors and servicers may well be a factor in the failure of servicers to modify mortgages voluntarily.

The bill would give servicers a reasonable amount of time to divest themselves either of any interests in home mortgages or of the authority to services mortgages. The likely outcome would be that the four biggest banks would “spin off” their mortgage servicing business, which would resolve the conflict of interest and result in smaller, less complex banks.