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

Several of the bankers testifying before the House FinancialrnServices Committee on Tuesday drew a close connection between principalrnreduction and the impediment to loan modifications posed by the existence ofrnsecond mortgages. 

As was covered in our earlier report, David Lowman, CEO forrnHome Lending at J.P. Morgan Chase was the most outspoken of the four witnessesrnon the topic of principal reduction, drawing what several newspapers calledrn”a line in the sand” about what his bank is willing to do in thatrnarea. He took a similar tack on secondrnmortgages. 

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

“Regardless of loan-to-value, he said,rnas long as borrowers continue to do the right thing and fulfill their contractualrnobligations, second liens that are current and producing cash flow to investorsrnhave value.”  He also said that secondrnlien modifications are not an impediment to first lien modifications; thatrnChase's HAMP first modification completion rate is virtually the same whetherrnor not the bank is aware of the existence of a second lien.

Lawson said that a broad-based second-lien principalrnreduction plan would reward past consumption by borrowers rather than housingrninvestment because internal data shows that over 50 percent of borrowers usedrnhome equity loan proceeds for repayment of debt or personal consumption.

Lawson and others referenced the Treasury Department's relativelyrnnew 2MP program that operates in conjunction with HAMP.  It will allow servicers to reduce therninterest rate to 1 percent for amortizing and 2 percent for interest only secondrnmortgages; extend the term of the second lien to 40 years; and requires servicersrnto forbear or forgive the same proportion of the second lien as was forborne orrnforgiven on the first.  They can receivernincentives for doing so.   Lawton saidrnthat the program will provide a mechanism for the second lien investor to sharernappropriately in the modification process so it does not disproportionatelyrnimpact the first lien investor.

Michael Heid, Co-President of Wells Fargo Home Mortgage saidrnthat his bank intends to offer the new FHA refinancing program announced forrn”underwater” borrowers last month and that the bank is committed tornensuring that second liens in its Home Equity Portfolio do not prevent suchrnrefinances from occurring.  He said thatrnWells Fargo would “closely follow the guidelines of the first lienrninvestors, including Fannie Mae and Freddie Mac, as the industry sorts out howrnto avoid the moral hazard implications that this new public policy option couldrnunintentionally yield.”

Barbara Desoer, President of Bank of America Home Loans saidrnthat some of the bank's investors have taken the approach that second liensrnmust be totally extinguished before the first lien holder takes any principalrnreduction.  Currently 15 percent of the 10.4rnmillion first mortgages serviced by Bank of American have a second mortgagernwith Bank of America and 16 percent have one with another lender and it hasrnbeen the bank's position not to let the presence of such liens preventrnmodification of the first lien.

She said that most of the bank's second loans continue tornhave collateral value, and of those where the second loan is underwater, arnsignificant number are still performing.  rnOf about 2.2 million second liens in the bank's investment portfoliornonly about 91,000 or four percent are delinquent, behind a delinquent firstrnmortgage, and not supported by any equity. rnThe bank has already written down $10.5 billion of its home equityrnportfolio in the last two years.

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

All four of the banks presenting testimony at the hearingrnwent 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 foreclosurernprevention efforts and trained 4,000 to assist borrowers.
• During 4th Quarter of 2009, helpedrnfamilies avoid foreclosure by a ratio of 15 to 1
• Assisted more than 825,000 borrowers in effortsrnto avoid foreclosure since 2007.
• Consistently ranked at or near the top ofrnTreasury's rankings for the HAMP program.

J.P.rnMorgan Chase

• Opened 37 Chase Homeownership Centers (CNOCs) inrn15 states with 15 more planned. Theserncenters have allowed 91,000 borrowers to meet face-to-face with mortgagerncounselors since early 2009.
• Hired 3,580 loan modification counselors lastrnyear for a total of 6,258 in 15 sites in addition to the CHOC staff.
• Hired additional mortgage operations employeesrnfor a total of 16,000 working exclusively with struggling customers.
• Handled over 12.8 million inbound calls fromrnhomeowners seeking foreclosure assistance in the 14 months ending lastrnFebruary.
• Completed 530 discounted sales/donations ofrnforeclosed properties to non-profits and state and local agencies in 24 states.
• Completed 110,175 permanent loan modificationsrnthrough HAMP and other programs.

Bank of America

• Assisted more than 800,000 customers with loanrnmodifications in the past two years through HAMP and its own proprietary programs.
• Completed 33,000 permanent modifications withrn35,000 more pending under HAMP.
• Field more than 125,000 calls from distressedrnborrowers each day.
• Employs more than 16,000 people “dedicated torndefault management and loan-modification efforts.

Wells Fargo

• Reduced principal on 50,000 mortgages with arntotal reduction of more than $2.6 billion through its own proprietary modificationrnprogram.
• Initiated more than one-half millionrnmodifications since the beginning of 2009, 75 percent of which were donernoutside of HAMP.
• Initiated process of having one employeernassigned to a modification from start to finish.
• Increased home preservation staff by 135 percentrnsince the beginning of 2009, adding 10,000 U.S.-based jobs for a total ofrn17,400 on its home preservation staff.
• Participated in more than 300 home preservationrnevents.
• Established 27 Home Preservation Centers in thernsix states with the most troubled loans.

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