House Financial Services Committee Chairman Barney Frank (D-Massachusetts) is calling for junior lien holders to take a loss on secondary mortgage debt, such as home equity loans, which he says have ""no real economic value"" considering the state of the housing market.[IMAGE]
Frank sent a letter to the CEOs of ""Bank of America"":http://www.bankofamerica.com, ""Citigroup"":http://www.citigroup.com, ""JPMorgan Chase"":http://www.jpmorganchase.com, and ""Wells Fargo"":http://www.wellsfargo.com last week demanding they ""take ""immediate steps to write down second mortgages,"" which servicers say are preventing them from providing sustainable loan modifications for troubled borrowers. And an influential group of mortgage investors are throwing their full support behind Frank's call to action.
The Mortgage Investors Coalition (MIC) represents holders of some $100 billion in mortgage securities, including insurers, asset managers, and hedge funds. The group has been pushing for principal write-downs for about a year now. Last month, the ""investors made their pitch"":http://www.dsnews.com/articles/mortgage-investors-push-for-principal-writedowns-2010-02-09 to Chairman Frank for reducing mortgage principals to allow underwater borrowers to refinance into new government-backed loans, and this week MIC issued a follow-up statement in favor of Frank's proposal.
Based on their fourth quarter 2009 filings with the Securities and Exchange Commission (SEC), the four banks in question collectively own more than $400 billion of the nation's $1 trillion second lien mortgage market. BofA holds $149 billion in junior liens, Citi has $54 billion, JPMorgan $101 billion, and Wells Fargo $115 billion.[COLUMN_BREAK]
Analysts from ""Amherst Securities Group"":http://amherstsecurities.com estimate that about half of non-agency homeowners with a securitized first mortgage also have a second lien mortgage, and many of them pay the second liens routinely because the payments are lower and the creditors more aggressive. Treasury estimates that about half of at-risk borrowers have a second lien.
The median debt-to-income burden carried by borrowers modified through the government's Home Affordable Modification Program (HAMP) is 59.7 percent Ã¢â‚¬" 31 to 41 percent of which can be attributed to second lien payments, according to information from one MIC member.
In order to reduce that debt burden and unwind the loan-to-value ratios of the roughly 25 percent of U.S. homeowners underwater on their mortgages, second lien mortgage debt must be reduced, Amherst analysts wrote in a January report.
A government program to modify second lien mortgages called ""2MP does exist"":http://www.financialstability.gov/docs/042809SecondLienFactSheet.pdf but Treasury has stalled on implementation because the banks that hold them can't afford it, six buy-side investors said. The sources all said implementation of the program, called 2MP, would result in ""catastrophic"" losses for the nation's four largest banks.
Treasury first introduced the 2MP on April 29, 2009. Since then, ""Bank of America is the only institution"":http://www.dsnews.com/articles/bofa-signs-on-as-first-servicer-of-hamps-second-lien-program-2010-01-26 to announce it will implement the program.
Wells Fargo spokesperson Mary Berg said the bank supports the ""spirit of the program"" but is not willing to commit before it has more guidance from Treasury.
Chase spokesperson Tom Kelly said his organization believes principal forbearance ""has the same payment impact as principal forgiveness.""
""Treasury continues to tell investors that any day now they will be out with a final program and they will be signed up,"" one hedge fund source said. ""The joke is really on us because they haven't done anything.""
Treasury spokesperson Meg Reilly sticks by the Department's routine response. She said, ""Treasury expects to release updated guidelines for the second lien program very soon.""