Lenders Discuss 2nd Lien Modification Issues and Defend Foreclosure Prevention Efforts

By: Jann Swanson •

Several of the bankers testifying before the House Financial Services Committee on Tuesday drew a close connection between principal reduction and the impediment to loan modifications posed by the existence of second mortgages. 

As was covered in our earlier report, David Lowman, CEO for Home Lending at J.P. Morgan Chase was the most outspoken of the four witnesses on the topic of principal reduction, drawing what several newspapers called "a line in the sand" about what his bank is willing to do in that area. He took a similar tack on second mortgages. 

First, he stressed that Chase borrowers were no more likely to be delinquent on second mortgages than on the primary loan.  He said that Chase data shows that 97 percent of borrowers in Chase's $98 billion second lien portfolio are performing on their loans, a percentage that drops only two points when the borrowers have a loan to value (LTV) exceeding 100 percent. 

"Regardless of loan-to-value, he said, as long as borrowers continue to do the right thing and fulfill their contractual obligations, second liens that are current and producing cash flow to investors have value."  He also said that second lien modifications are not an impediment to first lien modifications; that Chase's HAMP first modification completion rate is virtually the same whether or not the bank is aware of the existence of a second lien.

Lawson said that a broad-based second-lien principal reduction plan would reward past consumption by borrowers rather than housing investment because internal data shows that over 50 percent of borrowers used home equity loan proceeds for repayment of debt or personal consumption.

Lawson and others referenced the Treasury Department's relatively new 2MP program that operates in conjunction with HAMP.  It will allow servicers to reduce the interest rate to 1 percent for amortizing and 2 percent for interest only second mortgages; extend the term of the second lien to 40 years; and requires servicers to forbear or forgive the same proportion of the second lien as was forborne or forgiven on the first.  They can receive incentives for doing so.   Lawton said that the program will provide a mechanism for the second lien investor to share appropriately in the modification process so it does not disproportionately impact the first lien investor.

Michael Heid, Co-President of Wells Fargo Home Mortgage said that his bank intends to offer the new FHA refinancing program announced for "underwater" borrowers last month and that the bank is committed to ensuring that second liens in its Home Equity Portfolio do not prevent such refinances from occurring.  He said that Wells Fargo would "closely follow the guidelines of the first lien investors, including Fannie Mae and Freddie Mac, as the industry sorts out how to avoid the moral hazard implications that this new public policy option could unintentionally yield."

Barbara Desoer, President of Bank of America Home Loans said that some of the bank's investors have taken the approach that second liens must be totally extinguished before the first lien holder takes any principal reduction.  Currently 15 percent of the 10.4 million first mortgages serviced by Bank of American have a second mortgage with Bank of America and 16 percent have one with another lender and it has been the bank's position not to let the presence of such liens prevent modification of the first lien.

She said that most of the bank's second loans continue to have collateral value, and of those where the second loan is underwater, a significant number are still performing.   Of about 2.2 million second liens in the bank's investment portfolio only about 91,000 or four percent are delinquent, behind a delinquent first mortgage, and not supported by any equity.  The bank has already written down $10.5 billion of its home equity portfolio in the last two years.

The Bank was the first to sign on to the 2MP program in January and on April 1 became the first to begin mailing modification offers to home equity customers who are in difficulty with their loans.

All four of the banks presenting testimony at the hearing went to great length to showcase their commitment to loan modifications. 

Here are some highlights of their presentations:

Citi Mortgage

  • Hired 1,400 new employees to support foreclosure prevention efforts and trained 4,000 to assist borrowers.
  • During 4th Quarter of 2009, helped families avoid foreclosure by a ratio of 15 to 1
  • Assisted more than 825,000 borrowers in efforts to avoid foreclosure since 2007.
  • Consistently ranked at or near the top of Treasury's rankings for the HAMP program.

J.P. Morgan Chase

  • Opened 37 Chase Homeownership Centers (CNOCs) in 15 states with 15 more planned. These centers have allowed 91,000 borrowers to meet face-to-face with mortgage counselors since early 2009.
  • Hired 3,580 loan modification counselors last year for a total of 6,258 in 15 sites in addition to the CHOC staff.
  • Hired additional mortgage operations employees for a total of 16,000 working exclusively with struggling customers.
  • Handled over 12.8 million inbound calls from homeowners seeking foreclosure assistance in the 14 months ending last February.
  • Completed 530 discounted sales/donations of foreclosed properties to non-profits and state and local agencies in 24 states.
  • Completed 110,175 permanent loan modifications through HAMP and other programs.

Bank of America

  • Assisted more than 800,000 customers with loan modifications in the past two years through HAMP and its own proprietary programs.
  • Completed 33,000 permanent modifications with 35,000 more pending under HAMP.
  • Field more than 125,000 calls from distressed borrowers each day.
  • Employs more than 16,000 people "dedicated to default management and loan-modification efforts.

Wells Fargo

  • Reduced principal on 50,000 mortgages with a total reduction of more than $2.6 billion through its own proprietary modification program.
  • Initiated more than one-half million modifications since the beginning of 2009, 75 percent of which were done outside of HAMP.
  • Initiated process of having one employee assigned to a modification from start to finish.
  • Increased home preservation staff by 135 percent since the beginning of 2009, adding 10,000 U.S.-based jobs for a total of 17,400 on its home preservation staff.
  • Participated in more than 300 home preservation events.
  • Established 27 Home Preservation Centers in the six states with the most troubled loans.