There was a nice moment in today’s House hearing on reasons lenders aren’t more readily reducing principal as a part of loan modifications (despite evidence that principal reduction has the most shot of keeping homeowners current on their mortgage payments). CitiMortgage CEO Sanjiv Das basically thanked the government for inserting itself into the debate. “The government’s role in getting us all together is welcome,” he said. “It’s important to get us all working together.”
What’s that now?
Das was referring to government efforts to guide how first- and second-lien holders should share the losses that come from loan modifications. For a long time now, there have been complaints, including from TARP’s inspector general, that the holders of second liens, such as home-equity loans, haven’t been willing to take a reduction in what they’re owed—and in the process have been holding up modifications.
The twist is that in many cases the second-lien holders are also servicing the loans. That is, they are the same companies—like Wells Fargo, JP Morgan Chase, Bank of America and Citigroup—deciding that payments on primary mortgages should be reduced. The investors who own many of these primary mortgages have been none too happy. Why should they take a hit if the holder of a subordinate lien doesn’t?
Well, it now seems there might be some movement on the issue. Last month, the Treasury Department announced it would be upping the financial incentives for second-lien holders to share in the losses that stem from loan modifications. Full disclosure: last year’s attempt to do this didn’t work out too well.
But, as Das pointed out, the feds forcing the conversation might in and of itself be doing some good. What we’re really talking about here is a coordination problem. If I’m JP Morgan Chase I sure as heck don’t want to start writing down my (sizable) home-equity book if my competitors aren’t going to do the same. That’s especially true since losses on home-equity loans are about to be a huge problem for Big Bank earnings.
Today members of Congress lined up the heads of the mortgage businesses at B of A, Citi, Chase and Wells Fargo and asked them to commit to second-lien holders sharing in the loan-modification losses. They all did. Will that completely satisfy investors who think that second liens should be wiped out entirely before the first mortgage is tinkered with? Maybe not. But it does feel like movement in the right direction.