Representative Barney Frank (D-Mass), chairman of the House Financial Service Committee, sent a letter of petition to the country’s top 4 banks this week demanding they take steps immediately to write down second mortgages. The letter sent to bank CEO’s at Bank of America, Citigroup, JP Morgan Chase and Wells Fargo asked for the banks cooperation in helping underwater mortgage holders who have second mortgages with their bank.
Frank’s letter stated, “Many homeowners are eager to save their homes despite being ‘underwater,’ but find that lenders and servicers are unable or unwilling to make necessary modifications. These homeowners are increasingly deciding to walk away.”
Second mortgages are holding up many homeowners from being able to participate in stimulus programs to save their home. Both short sales and home modification loan programs are out of reach for most homeowners who have second mortgages. This is because the lien holders of second mortgages have been unwilling to budge on loan terms. As a result, many homeowners who are desperately trying to save their homes are instead being forced into foreclosure.
Frank is quick to point out that most second liens have “no real value.” When the first lien is underwater, second lien holders in almost all cases will see no real return on the loan. Frank stresses that, “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, which would allow willing first lien holders to reduce principal and keep borrowers in their home.”
In his letter Frank let the bank CEO’s know he was serious. He states, “I will be calling you within the week to discuss what your institutions plan to do to remove the second liens you own or control as impediments to principal reduction modifications.”
The Obama administration is right on board with Frank and has included a second lien component in HAMP, the Home Affordable Modification Program. The program, which will begin over the next few weeks, now includes a provision for extinguishing second mortgages. When a first lien is modified under the program, there will automatically be a modification of the second lien. The program’s success just might be balancing on how big an influence Frank will have on the banks. To date, of the four banks only Bank of America has committed participation in HAMP.