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Treasury Department Battling With Banks Over Second Liens
The Government's plan to help homeowners re-structure their mortgages, part of an overall plan to stabilize the housing market, could fail miserably should Wall Street continue its strict policies concerning its interest in those properties. The plan enables mortgage giant Fannie Mae and Freddie Mac to restructure the mortgages of homeowners that have seen their property's value decline, yet the banking industry has a small stake in most of those mortgages and could, in essence, thwart the plan. The second liens held by the banks enable them to block the refinancing which they may be inclined to do since they, in total, add up to huge sums of money. At 2008's end, Bank of America's second liens added up to almost $150 billion; Wells Fargo's almost $130 billion, and JP Morgan Chase held over $130 billion in second liens. Since the government took over Fannie Mae and Freddie Mac in September, it has used them to attempt to bring relief to the real estate crisis. Privately owned banks, on the other hand, are not so easy to dictate to.
The Treasury Dept. held a meeting a week ago with some of the larger mortgage servicers to explore the issue of 2nd liens and the housing crisis in general. Lending agencies in general are supportive of the housing rescue plan but have reservations concerning Treasury's plans toward second liens. The plan is unclear concerning the 2nd lien holder getting paid. However, when the 1st lien performs, the health of a 2nd mortgage benefits.
An insider present at the meeting said that little progress was made and that the holders of 1st liens were unwilling to purchase 2nd liens for their full value since they were already losing money on their mortgages.
The issue is further convoluted by plummeting property values and the long odds against a fast recovery. When the market was booming, 2nd liens were commonly substituted for buyers' down payments. Nowadays, most of those 2nd liens are practically worthless because home values have plunged and selling the home would not even cover the 1st mortgage. Some lenders have claimed that homeowners have begun to neglect payments on 2nd liens because they know that lenders can't retaliate. The Treasury's plan would reward mortgage holders who make payments on time with lower rates which has many lenders asking why they should have to lose their stake in the previous loans.
Treasury officials have pledged they will present a plan to purchase second liens, though they have not released any details. There is likely to be a hard-fought battle over the next few weeks between Treasury and the banking industry over the issue of 2nd liens. The same issue was responsible, in part, for the failure of the Hope for Homeowners program. That program was instituted last summer with the goal of helping 400,000 homeowners avoid foreclosure, of which only a few dozen have actually received any help.