Hidden Barrier

After several years of attempting to bring government action to bear on the housing finance meltdown, the obvious solution of taking smaller losses by renegotiating principal balances on mortgages for primary residences has gone almost nowhere.

Insiders know that the barrier to these resolutions is often in the second mortgage holder, a player at the table that gets more the longer it takes, unlike everyone else at the table (including the taxpayer) who get less.

Housing Wire online has an excellent article describing yesterday’s hearing before the House Financial Services Committee.

As even a Congressman can figure out, if a borrower is underwater on their first mortgage, holders of a second lien shouldn’t be putting a very high value on that loan.  Putting it quite succinctly, Brad Miller of North Carolina’s 13th District observed that “Second lien holders lose everything before first holders lose anything.”

For some reason, those willing to accept this as fact hasn’t included major banks that made a $400 billion business of HELOCs (Home Equity Lines of Credit).  The reason?  They make huge fees and a nice interest rate spread on those loans, almost as much as they make on credit cards.  A write-down would obviously hit their capital base, while delay will allow them to continue to accrue interest and penalties on the loan, and keep them in the “spoiler” position that gets them paid to go away in a short sale or another negotiated resolution of the troubled first mortgage.

At the same hearing of the Financial Services Committee we were treated to the following gem:

“The concept of a write-down or extinguishment of second lien mortgages needs to be reexamined, we may be going too far, to the extreme, in saying second mortgages are worth nothing” said Sanjiv Das, CEO of CitiMortgage. … “They are almost behaving like an unsecured line of credit,” he added, “and that needs to be taken into account.”

The clearest case of a second lien that should be written off has to be a case where the borrower has declared personal bankruptcy.  At least that’s what my common sense tells me.

Imagine, then, what kind of tortuous logic it takes for a banker to suggest that the bankruptcy code should be modified so that any principal write-down on a first mortgage be shared pro-rata with the second lien holder.

I suppose this demonstrates why I was never considered for the CEO position when I worked at various banks.  I just couldn’t imagine saying I deserved to have the law changed so that my second lien position gets treated equally with the first lien.  Sanctity of contracts being more important than one quarter’s profits, and all that.

I obviously didn’t have the adjustable moral compass needed to maximize profit.



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