U.S. housing rescue threatened by banks

WASHINGTON (Reuters) - The U.S. Treasury Department’s effort to help 5 million homeowners win reworked mortgages, part of a plan to stabilize housing, could fall flat if Wall Street does not relax its interest in the properties.

A sign advertising a home for sale at a reduced price is shown in Pacifica, California December 31, 2008. REUTERS/Robert Galbraith/Files

While the initiative empowers Fannie Mae and Freddie Mac to refinance borrowers whose homes have lost value in recent years, big banks own a small stake in many of those loans and could effectively block the plan.

Those relatively modest investments, or second liens, allow lenders to veto the refinancing plan and they might do so since those small stakes add up to big dollars.

Bank of America held $148 billion in second liens at the end of last year, while JPMorgan Chase held $131.4 billion and Wells Fargo & Co. held $129.9 billion, according to Inside Mortgage Finance.

Since Fannie Mae and Freddie Mac were effectively nationalized in September, the government has used the mortgage-finance companies to try and alleviate the housing crisis. Private banks, however, are more difficult to control.

Last week, the Treasury Department hosted a meeting of large mortgage servicers to discuss the question of second liens and the broader housing rescue.

Big lenders generally support the housing rescue plan but have misgivings about Treasury’s intentions for second liens, several industry sources said.

“The (housing rescue) plan does nothing to benefit the second lien beyond attempting to provide a framework that allows the first lien to perform and get paid,” said Terry Francisco, a spokesperson for Bank of America.

The plan does not make clear whether the second lien holder will ever get paid off, but if the first lien continues to perform, odds improve for the health of the second mortgage, Francisco said. He hopes the discussions with Treasury lead to a workable process to deal with second liens.

A person with knowledge of the meeting at Treasury last Wednesday said there was little agreement on how to solve the dilemma, adding that first-lien holders were reluctant to buy out second mortgages at full value when they already faced a reduction in income on the first mortgage.


The question is complicated by falling home values and the odds of a quick recovery.

During the recent housing boom, second liens were a popular substitute for a buyer’s downpayment and were also used to wring cash out of homes that had spiked in value.

In the current market, many second liens are all but worthless because the home has sunk in value and a sale would not even cover the first note. Many lenders report that borrowers are skipping payments on their second lien, knowing that the mortgage company has little recourse.

The Treasury plan, though, would reward timely borrowers with a cheaper mortgage and many finance companies are asking why they should relinquish their stake in the existing loans.

“These are performing loans. Why would we walk away from them?” said one mortgage industry source.

Early this month, Treasury officials promised that they will present a payment schedule to buy out second liens but they have not yet released details.

In the next few weeks, the Treasury and large finance companies may engage in a game of chicken over second liens and other details of the housing rescue plan laid out by the Obama administration on February 18.

Unresolved issues concerning second liens was partly what doomed the Hope for Homeowners program was crafted last summer with the aim of saving 400,000 troubled borrowers from foreclosure. Only a few dozen homeowners have received help.

Editing by Chizu Nomiyama