Forcing Humpty Dumpty to Put Himself Back Together Again: Writing Down Second Mortgages

Monday, March 08, 2010 , , , , 3 Comments

Humpty Dumpty sat on a wall.
Humpty Dumpty had a great fall.
All the king's horses and all the king's men
Couldn't put Humpty together again!


Pressure is growing on U.S. banks to ease terms for distressed homeowners on home-equity loans and other second-lien mortgages.

Rep. Barney Frank, chairman of the House Financial Services Committee, last week sent a letter to the four biggest U.S. banks demanding "immediate steps to write down second mortgages."

The Massachusetts Democrat sent the letter to the chief executive officers of Bank of America Corp., Citigroup Inc., J.P. Morgan Chase & Co. and Wells Fargo & Co. Meanwhile, the Obama administration is preparing to launch long-planned initiatives aimed at addressing obstacles to restructuring mortgages.

Rep. Frank said banks' reluctance to write down second mortgages is hurting efforts to reduce the first-lien mortgage balances of many borrowers who owe farm more on their loans than the current values of their homes. Reducing the mortgage balance typically requires cooperation from both the first- and second-lein [sic] holders.

Because such "underwater" borrowers often feel little incentive to keep paying, "homeowners are increasingly deciding to walk away and thus foreclosures continue to mount," Mr. Frank said.

You can't force people to stay in houses they could never afford, Mr Frank, though I'm sure you're going to try anyway. Best of luck with that.

But wait, there's more. Check The Atlantic:

Short sale is often a sensible option for the bank. If the borrower were to foreclose anyway, then additional legal and administrative costs would be incurred. The bank would have to put the home on auction and eventually sell it. If the short sale offer is in the ballpark of what the bank believes it would get at the auction anyway, then it might as well consent. In such cases, the bank is better off short selling than foreclosing.

The Treasury wants to encourage banks to do more of this. Here's how the program would work, according to the Times:

To bring the various parties to the table -- the homeowner, the lender that services the loan, the investor that owns the loan, the bank that owns the second mortgage on the property -- the government intends to spread its cash around.

Under the new program, the servicing bank, as with all modifications, will get $1,000. Another $1,000 can go toward a second loan, if there is one. And for the first time the government would give money to the distressed homeowners themselves. They will get $1,500 in "relocation assistance."

Frankly, $1,000 probably isn't enough in most situations for a bank holding a first mortgage to agree to short sale if it wasn't willing to before. That's sort of like if a potential buyer had offered $140,000 for a home with a $200,000 outstanding mortgage, now she would effectively offer the bank $141,000 instead. Sure, that's more, but if the bank wasn't comfortable selling the home before, I'm pretty unconvinced that another measly $1,000 is going to do much. At best, this could help in the cases where short sale is on the border line.

Again, just another band-aid that does nothing to solve the root of the problem - which is kind of like slapping some Neosporin on a cancerous tumor and calling it cured but who am I to judge?

Jr Deputy Accountant

Some say he’s half man half fish, others say he’s more of a seventy/thirty split. Either way he’s a fishy bastard.


Anonymous said...

Anonymous said...
Anonymous said...

It is mind boggling the number of people put down 0% by way of borrowing a conventional first mortgage and then financed all of the down payment via a "piggy back second" mortgage over the past 10 years or so. People smoked crack before they drew up their lending policies. It's a crying shame when people get this hooked on debt. I spend a fair amount of my time trying to talk people into sensible lending solutions that are contrary to what they really want to do - that being to take out a long rope and more or less hang themselves with it. It's like trying to talk a suicide off of a ledge. Sometimes, I just want to say "fuck it - just jump already".