Banks, Government need to address second liens

•     Published April 2 in The Daily Record.

      For anyone who thinks that the nation’s housing mess that is getting better, think again.
     Yes, sales in the area are moving in a positive direction and the decline in home values – although still a significant problem — is not as steep recently in as many areas. Still, it’s apparent that homeowners, who might normally be looking to move up or scale down to another home, are frozen mainly because the combined value of their first and second mortgage or home equity line exceeds the value of their home.
     There’s been the notion that there is a wide river of hard-working homeowners who are current on their primary mortgage and equity line, but who are handcuffed because the equity line that they took out five years ago has now helped to put them underwater.
     Second liens are noose around the homeowner’s neck right now and until the government and the banks come to the realization that this has to be seriously addressed, the housing market will not come back with any form of gusto.
     Before the meltdown most lenders offered 80-20 combo loans for 100 percent financing. Banks, in addition, spent millions on marketing and advertising, offering home equity lines to current homeowners who could then take out up to 100 percent value of the residence. And remember the ease of the qualifying process on how banks created these lines? They’d get the required information about job, income and assets and then ask you what you thought the value of your home was. You gave them a favorable number and within hours you would get a call back, telling you that you were approved for that line because if your assessment came close to their automated valuation model (AVM), no problem.
     Certainly homeowners have a responsibility for their actions. But the banks do as well. They were the pushers and the homeowners were the junkies. And everything was based on the assumption that home values would continue to rise.
     Well, now we know that is not the case, and here we sit almost three years after the meltdown. Those homeowners with variable equity lines – most of which are tied to the prime rate — have been fortunate that the Federal Reserve, because of the banking crisis, has kept that interest rate about as low as it can go.
     But as the economy continues to recover it is silly to assume that the prime rate will continue to be kept so artificially low. That rate is currently at 3.25 percent. Typically the minimum payment required is an interest-only payment. So if a homeowner has an outstanding equity line of $100,000 at prime with no add-on margin, the monthly payment is $270 a month. But as quick as the Fed took down rates, it can raise them just as fast. So let’s say in the next 18 months the prime rate moves to 5.25 percent. That payment now becomes $437.50.
     The consequences? The homeowner has a bigger bill (and a bill that may still climb if rates climb) and less cash to spend on goods and services. That doesn’t help the economy. They can’t refinance back into a single mortgage because their combined loan to value is higher than the value of their home. They may want to sell, but can’t because they don’t have money to bring to the table or they are scared that a short sale will – and it will – adversely affect their credit.
     The interactions between lenders, servicers, investors and trustees of those mortgage-backed securities are so intertwined, intricate and convoluted, that it makes it almost impossible for anything to get done.
But something – short of a kids’ call for a “do-over” – has to be done.
     In early March, House Financial Services Chairman Barney Frank sent a letter to the four biggest banks – Bank of America, Wells Fargo, Citigroup and JP Morgan Chase – asking them to write down second-lien mortgages in an effort to facilitate modifications and prevent foreclosures. In a foreclosure banks know that a second lien is basically worthless. But in a modification, the second lien holder still has some say. And many times, the holder of the second mortgage is a roadblock to a modification.
     What can the government do to force the banks with second liens to consider more write downs of principal? Certainly not that much as most banks are in the process of ending their TARP involvement. But that does not mean the government is powerless.
     Last week, the Treasury Department updated its Home Affordable Modification Program (HAMP) to start addressing the second lien problem. It calls for incentive payments from the government to loan servicers who write down balances for those who qualify under the HEMP program and for those who are at 115 percent loan to value on their home or more.
     The problem is that these programs being dangled in front of the banks to do more modifications and principal reductions are voluntary. So if it is voluntary and there is no real threat of government enforcement, why should banks accelerate modifications and think hard about helping homeowners with principal reductions. It seems the only way banks will do more is if they get more incentive from the government. How much more incentive? Who knows?
     Nevertheless, if the government and the housing industry want to really assist homeowners they need to start thinking first about how to solve the second mortgage mess.
        Robert Nusgart is a loan officer with Prospect Mortgage, LLC., a division of The Strata Group in Baltimore. He can be reached at 443-632-0858 or by email at Robert.Nusgart@prospectmtg.com. Visit his website at www.RobertNusgart.com for the latest mortgage and financial news.
He can also be heard periodically on The Real Estate Hour at Sunday noon with Brandon Gaines of Yerman, Witman, Gaines and Conklin Realty on WBAL 1090-AM.

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