Top Four Banks Ready to Write-Down Second Liens
In a hearing today before the House Financial Services Committee, representatives from Bank of America (BAC), Citi (C), JP Morgan Chase (JPM) and Wells Fargo (WFC) report that they do not feel efforts to satisfy second lien obligations represent a conflict of interest between the desires of investors and the needs of distressed borrowers. As a result, they are willing to write-down second liens if first lien lenders are doing the same. All four lenders are participants in the Second Lien Modification Program, known as 2MP, which is struggling to gain traction. The big four banks together hold roughly half of the nation's second liens, representing $423bn in home equity lines of credit (HELOCs), of which $150bn is likely collateralized by negative equity homes. As HousingWire first reported, there remains a substantial risk to bond holders of second liens, should the HELOCs be extinguished. In other cases, bond holders on the first liens often did not know that borrowers had this additional burden, potentially raising the risk of steady repay. The alarm is loud enough now that the HFSC is considering wrapping HELOC issues in with other parts of government-bailouts and also considered drafting legislation that would change the very bankruptcy laws in effect today. The hearing today, titled "Second Liens and Other Barriers to Principal Reduction as an Effective Foreclosure Mitigation Program," did, to the contrary, start by suggesting that foreclosure mitigation is not always the best answer for certain types of distressed borrowers. "Some agreement: Not everybody who's in default is going to get help or should be helped," said HFSC chair Barney Frank (D-Mass.). "There are people who made mistakes and misjudgments." "I have long felt that we are pushing too many people into homeownership and not doing enough for rental housing and that was no favor to anybody," he added. This spirit of there always being an exception to the rule, the "except in certain cases" clause rang out time and time again during the hearing, but the four representative from the banks agreed that second liens are a delicate matter, for borrower and investor alike. "The concept of a write-down or extinguishment of second lien mortgages needs to be reexamined, we may be going to far, to the extreme, in saying second mortgages are worth nothing" said Sanjiv Das, CEO of CitiMortgage. "By and large, our mortgages are performing really well and the reason they're performing well is that buyers tend to look at them as an important source of cash flow, and tend not to think about them in terms of how much collateral or equity is in their homes." "They are almost behaving like an unsecured line of credit," he added, "and that needs to be taken into account." The lion's share of second liens may be held by the big four banks. But, according to Barbara Desoer, president of Bank of America Home Loans, the products still maintain a diverse set of investors. For example, 30% of their 14m mortgage portfolio has a second lien. But only half of that is serviced by BofA, the other half is "other investors," she said. Citi's Das said that it is not an issue of conflict, but one of capacity and liquidity for the banks, arguing that principal writedowns of the first are no good, if the borrower uses the relief to pay the second, or is at least incentivized to do so by the second lien servicer; a charge levied by the committee. Representative Brad Miller (D-NC) clarified the law for bondholders: "Second lien holders lose everything before first holders lose anything." "Suggesting a servicer agreeing to a pro rata reduction in principal on the second, that they agree to on behalf of investors, strikes me as evidence of a conflict of interest," he said in response to discussion that bankruptcy laws be changed to allow for second lien modification, in concert with firsts, in the case of homeowner bankruptcy (which Desoer said BofA would support "in certain cases"). Mike Heid, co-president of Wells Fargo Home Mortgage, argued that alternatives should be considered before such extreme measures are adopted. "We've been trying the other alternatives now, and have been for three years, with not much to show for it," Miller responded. The three aforementioned spokespeople reiterated support for comprehensive regulatory reform regarding the absolution of the second-lien issue, as did the firm that showed the strongest reservations against the write-downs, JPMorgan Chase Home Lending with CEO David Lowman, also in attendance. Write to Jacob Gaffney. Disclosure: the author holds no relevant investment positions.