U.S. banks pay lip service to second mortgages

March 23, 2010

By Rolfe Winkler

JPMorgan this week became the latest in a trickle of big banks willing to modify second mortgages for some struggling U.S. borrowers. While it’s a baby step in the right direction, it won’t do much to fix America’s foreclosure woes.

Second-lien loans, essentially top-up mortgages, look like a good place to start addressing the problem of borrowers who can’t keep up with payments. After all, second liens are subordinate to first mortgages. So when it comes to cutting interest or principal payments, they should logically come first.

But the U.S. government has primarily tackled first mortgages — and hasn’t got that far even there. The Home Affordable Modification Program (HAMP), which is designed to facilitate mortgage payment reductions, is aimed at several million struggling borrowers. Of 1.4 million trial modifications offered so far, only 170,000 have resulted in adjustments that the program sees as “permanent”. In reality, even after modification many borrowers are still overburdened, and further defaults look inevitable.

That ought to focus banks’ attention on their second-lien loans. There may be little or no chance many of them will ever be repaid. But banks have avoided writing down second liens because accounting rules allow them to consider the loans to be performing so long as borrowers make interest payments.

It’s easy to understand why the banks are kicking the issue down the road. According to Amherst Securities, of $1.05 trillion in outstanding second liens, commercial banks hold $767 billion. Bank of America, Citigroup, JPMorgan and Wells Fargo alone hold $442 billion of them.

A government modification program for second liens known as 2MP, a companion for the HAMP program, was first put forward a year ago. But Bank of America, Wells Fargo and now JPMorgan have only recently joined. Nor is it likely to reach many borrowers since it targets only those few who achieve “permanent” modifications under HAMP. Assuming around half distressed homeowners have second mortgages, this would cover some 85,000 second liens, only scratching the surface of the millions that are outstanding.

It’s good news that banks are finally willing to discuss second lien modifications. But to keep more struggling U.S. borrowers in their homes — a better outcome for banks and borrowers alike than foreclosure — banks need to forgive loan principal on a much larger scale so that borrowers again have skin in the game.


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I find it hard to believe that people are keeping current on their second mortgages. 25% real unemployment is quickly moving to 30%

Posted by Story_Burn | Report as abusive

Three things are at issue here.

One is, that toxic mortgage-backed securities were puffed up by a ten-to-one (or more) ratio of bogus fluff relative to collateral value of primary and secondary mortgages combined, then many-fold leveraged again, triggering a nationwide avalanche of actuarial liability so far beyond redemption that it would still rot even if all homeowners paid everything on time and in full. A generation of auditors will be needed to figure out where the money went. Out of the grass-roots economy, is for sure.

Two: at this point, it really no longer matters what homeowners do, the economy is ludicrously screwed from the top down. Three: the predatory fashion in which mortgages – primary, secondary and tertiary – have been structured and energetically purveyed for the past 5-10 years is undeniably as blameworthy for current exposure to end-user default as a relatively few bad apples on the prospective home-buyer side.

What is being referred to here as “forgiving” loans – if it even happens – is like the banks burning part of the DNA left at the scene of their own crimes. Not good enough to acquit them.

Roman Emperor Justinian codified the distinction between real (immovable) and other property, by law. The banks have made it their business to violate its first principle. Funnily, the same so-called financial experts who caused the ensuing crisis by over-liquifying the entire Western economy seem to have no more imaginatve repertoire now than squealing about the fallout.

Let *them* eat cake.

Posted by HBC | Report as abusive

Our thinking is muddled. Interest rates are almost 0%, therefore any capital payment relief = moratoriums. Depending on reserves, and ‘Real’ IFRS, banks could provide for these. Yes, all aggregated mortgages should be coverered by at least equal collateral market values.

Maybe the Justinian State should simply hand out Walmart Food HAMPers. The real problem here is credit card repayments, where the Effective Annual Rate is high. It beats me why plastic beats mortar.

Rolfe,your article has no link to disposable income after taxes, car leases/HP’s, credit card repayments and other credit downpayments, average mortgage values, etc. I miss your line and bar graphs and pie charts.

Posted by Ghandiolfini | Report as abusive

For banking reviews in the US please visit:

Bank Reviews

Posted by Dokemion | Report as abusive

Thanks for writing about this.

For banking reviews in the US please visit:

Bank Reviews

Posted by Dokemion | Report as abusive

[…] paying an average of 60 percent of their before-tax income towards debt and house expenses (see slide 6). That’s not close to a sustainable level of debt, so defaults down the road look […]

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