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Silent second risk ends with a whisper

In April 2010, the next big bubble set to burst in housing was coming in the form of second-lien defaults.

At the forefront of the call to banks to write-downs these huge pockets of risk exposure sat Rep. Barney Frank, D-Mass., then the head of the House Financial Services Committee.

Second-lien risk was a headline grabber, in case you forgot. The title of one such committee hearing on the topic, chaired by Frank, was "Second Liens and Other Barriers to Principal Reduction as an Effective Foreclosure Mitigation Program."

The big four banks agreed to start second-lien write-downs as a result of that hearing. They've continued to do second-lien modifications under HAMP. Mortgage servicers started 60,000 second-lien modifications in January and 65,000 in February this year.

So far, it's the big bang that never happened. Sources tell me that in cases where modifications are doable, the big banks are silently forbearing the loan. As the economy improves, the banks will revisit those liabilities, when feasible.

Regardless, second-lien defaults are currently at the lowest level since 2006. This tidbit proves the effectiveness of the mitigation strategies.

The fact that the so-called silent-second risk faded away in two years makes it potentially one of the few success stories in housing since the credit crisis began.



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