As servicers step up efforts to modify loans and keep borrowers in their homes, many are tripping over stumbling blocks in the form of home equity loans and other second lien mortgages. House Financial ServicesCommittee Chairman Barney Frank (D- Massachusetts) has sent out a petition to some of the nation's largest junior lien holders demanding that they take ""immediate steps to write down second mortgages"" to create a clear path for sustainable loan restructurings.
Reducing a homeowner's overall debt so that modified payments are within their capabilities can be hampered when there is also a second home equity mortgage hanging in the balance Ã¢â‚¬" pushing the borrower further underwater in the wake of falling home prices. In such situations, reducing the borrower's outstanding mortgage balance requires cooperation from both the first and second lien holders.
In a letter to the CEOs of Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo, Frank wrote, ""Many homeowners are eager to save their homes despite being Ã¢â‚¬Ëœunderwater,' but find that lenders and servicers are unable or unwilling to make necessary modifications. These homeowners are increasingly deciding to walk away.""
The committee chairman says many investors in first-lien mortgages have indicated that they are willing to accept significant losses in order to move on and use their money for other purposes, rather than having it locked in underwater mortgages with a high likelihood of foreclosure. With the interests of homeowners and investors aligned in this way, Frank says it should follow that large numbers of principal-reduction modifications can be made relatively quickly.
""That is not happening,"" Frank wrote. ""According to investors, administration officials, and other experts I have consultedÃ¢â‚¬Â¦the problem of second-lien mortgages standing in the way of successful principal reduction modifications has reached a critical stage and requires immediate attention from your institutions.""
Frank argues that most of these second liens have ""no real economic value,"" since the first liens are well underwater, and the prospect for any real return on the seconds is ""negligible.""
But he notes, ""Because accounting rules allow holders of these seconds to carry the loans at artificially high values, many refuse to acknowledge the losses and write down the loans, which would allow willing first lien holders to reduce principal and keep
borrowers in their homes.""
Frank is demanding a quick response from the four banks in his line of sight. ""I will be calling you within the week to discuss what your institutions plan to do to remove the second liens you own or control as impediments to principal reduction modifications,"" he said in the letter.
""To save homes on a large scale, we must move past temporary modifications in interest rates or terms and focus on permanent principal reductions that result in truly sustainable mortgages,"" Frank wrote. ""There is no more important priority for me in our efforts to restore stability to our mortgage market.""
The administration has incorporated a second lien component into its Home Affordable Modification Program (HAMP), which is slated to begin within the next few weeks. It includes a payment schedule for extinguishing second mortgages and the automatic modification of a second lien when a first lien is modified. Bank of America signed on to the program in January, but none of the other major servicers have agreed to participate.
Second liens can also prove to be an obstacle for short sales, the focal point of the administration's Home Affordable Foreclosure Alternatives (HAFA) program set to take effect April 5. Although the first lien holder may agree to the sale of a home for less than the outstanding mortgage balance in order to circumvent a foreclosure, if there is also a second lien on the property, the sale can fall through if the junior lien holder will not relinquish their claim.