Banks Pressed on Second Mortgages

By JAMES R. HAGERTY Published: March 8, 2010 By: THE WALL STREET JOURNAL

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 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.

Many second liens have little value because of the plunge in home prices, Rep. Frank wrote, adding: "Yet 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."

A Bank of America spokesman said that bank is "committed to working with all interested parties to develop additional solutions to help homeowners modify first and second mortgages."

A Wells spokeswoman said the bank is helping "as many customers as we can find options to help pay their home equity loans."

A J.P. Morgan spokesman declined to comment. Citigroup didn't respond to a request for comment.

Lack of cooperation from holders of second liens also can block short sales, in which the first-lien lender allows the home to be sold for less than the loan balance to avoid foreclosure. If the second-lien holder continues to press its claim, the sale can fall through. The ensuing foreclosure is likely more costly for all parties than a short sale would have been.

Under an Obama administration program due to begin in the next few weeks, many borrowers who get reduced payments on their first-lien mortgage through the administration's Home Affordable Modification Program automatically would get a break on their second-lien mortgage. Bank of America has agreed to take part and other big lenders are expected to follow suit.

In April, the administration is due to launch incentives to boost alternatives to foreclosure for people who don't qualify for a loan modification. They include short sales and so-called deeds in lieu of foreclosure, in which the borrower voluntarily gives up the title and often gets funds to help with moving expenses.

Most first-lien home loans are held by government-controlled mortgage firms Fannie Mae and Freddie Mac or by other investors in mortgage securities. By contrast, banks hold most second and other junior-lien mortgages.

About $1.05 trillion of junior-lien home loans were outstanding as of Sept. 30, according to the Federal Reserve. Of those loans, $766.7 billion were held by commercial banks. Most of the rest of the loans were held by savings banks and credit unions.

If banks are forced to write down or off big amounts of the mortgages, many would suffer major dents in their capital.