Mortgage Investors Say Big Banks Need to Modify Second Mortgages

In response to the notable first quarter profits recently reported by Bank of America, Citigroup, JPMorgan Chase & Co., and Wells Fargo, the Association of Mortgage

Investors (AMI) released a statement saying these four banks need to stop shifting their mortgage losses to private investors and confront their conflicts of interest.

The association said the banks remain conflicted by their massive investment in portfolios of home equity loans and lines of credit and servicing fees. According to AMI, BofA, Citi, JPMorgan, and Wells Fargo service approximately 40 percent of mortgages and held roughly $419 billion of second liens on their balance sheets as of December 31, 2009.

While the four banks have aggressively modified first mortgage debt, they have done little to nothing on second mortgage debt, which they own, AMI explained. As a result, homeowners remain deeply in debt with second mortgages that continue to exceed the current value of their home.

According to AMI, banks are currently able to defer the recognition of losses on the second lien portfolios under temporary loan modification programs such as Making Home Affordable. In fact, the association said the current Home Affordable Modification Program (HAMP) actually improves the cash flow available to the second mortgage at the expense of the first mortgage and defers the immediate loss that would be recognizable in a foreclosure, short sale, or short refinance.

In its statement, AMI said it would like banks to provide a full and transparent accounting of their second lien modifications where they own first and second liens on the same property. And the association asked policymakers to question whether banks should get any taxpayer-funded incentive payment if they’re avoiding transparency.

The largest institutions have already signed up for the administration’s Second Lien Modification Program under HAMP, but that one-year old program has yet to be implemented, AMI noted.

In addition to encouraging banks to modify second liens, the association recommended appointing special servicers in situation where the bank-owned servicer has a conflict and revising safe harbor to only work when debt reduction are shared by all creditors. Furthermore, AMI suggested allowing investor-appointed third parties to review loan files for violations of representations and warranties, and the organization proposed creating an all-encompassing homeowner restricting framework.

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