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2nd Lender May Have to Write Down Principle for Loan Modifications

By
Real Estate Agent with eXp Realty 7922

KingCountyHomeSolutionsMany of the loan modifications in process are running into challenges when the second mortgage holder is asked to cooperate. Homeowners trying to stop foreclosure in Maple Valley are having success with their first lien holders just to find out that the second mortgage holder is refusing to cooperate. House Financial Services Committee 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 to 31% of their monthly income so that modified payments are within their budgets 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 ‘underwater,' but find that lenders and servicers are unable or unwilling to make necessary modifications. These homeowners are increasingly forced to short sale their homes or walk away and let the first lien holder foreclose due to the lack of cooperation.  In many cases where the homeowner and the first lien holder are in alignment with both benefiting from a modification, the junior lien holder holds veto power over the agreement and is often exercising their right to cast the deciding vote for no deal. Frank wrote. "According to investors, administration officials, and other experts I have consulted...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." So in the end the homeowner loses their home over an accounting strategy that allows the second lienholder to keep their book values artificially high.

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 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.

Steve, Joel & Steve A. Chain
Chain Real Estate Investments & Mortgage, Steve & Joel Chain - Cottonwood, CA

Ken,

It's a tough call for a 2nd lien holder to give up their position, but as you stated if the position has no Real-cash-value , why not at least help the borrower out. 

Steve

Mar 29, 2010 05:04 PM
Vickie Nagy
Coldwell Banker Residential Real Estate - Palm Springs, CA
Vickie Jean the Palm Springs Condo Queen

Ken, I'd love to see the junior lien holders cooperate more freely. I'll keep watching for updates.

Mar 29, 2010 05:09 PM
Tim Lorenz
TIM LORENZ - Elite Home Sales Team - Mission Viejo, CA
949 874-2247

Ken,

Frank. alway messes thing up.  How do you tell the second to go away and the 1st get the payments?

 

Mar 29, 2010 05:24 PM
Kenneth Young
Uni International LLC - Virginia Beach, VA

Good post, interesting ideas.... since we are now doing loan mods, we have figured out a way around this problem.   I copied down your post and will distribute it to our employees tomorrow, let them try to figure out a solution.  (it's always good to make people think about better ways of doing business)....

 

Kenneth

Mar 29, 2010 08:09 PM
Ken Crotts
eXp Realty - Maple Valley, WA
Combining Experience and Innovation

The second lienholders are hanging on to worthless paper and in this case I agree with Frank (first time ever) that they should write down the principle especially with loan modifications. There are 3 general scenarios for them.

  1. Foreclosure. This is going to wipe out the note all together and they get nothing.
  2. Short sale. They get $3,000 to $5,000 on the note.
  3. Loan Modification. The borrower continues to make some payments on a reduced interest rate and/or balance and they continue to receive some value.

This is a bit of an over simplification but it is clear that negotiating with a willing homeowner in a collaborative manner would yield them the greatest return. With borrowers who have greater assets I am seeing them willingly negotiate better deals for the seconds with notes and cash payments after the short sale is closed.

The 2nds obstinance reflects poor judgment in my opinion since they are often the reason the property ends up in foreclosure when better alternatives were available and actively sought by the other parties in the transaction.

Mar 30, 2010 01:16 AM
Tony and Suzanne Marriott, Associate Brokers
Serving the Greater Phoenix and Scottsdale Metropolitan Area - Scottsdale, AZ
Haven Express @ Keller Williams Arizona Realty

Junior Liens when handled correctly do not need to tank a short sale transaction.  Persistence is key.

Dec 22, 2010 02:48 AM