Lenders Discuss 2nd Lien Modification Issues and Defend Foreclosure Prevention Efforts
Several of the bankers testifying before the House Financial
Services Committee on Tuesday drew a close connection between principal
reduction and the impediment to loan modifications posed by the existence of
As was covered in our earlier report, David Lowman, CEO for
Home Lending at J.P. Morgan Chase was the most outspoken of the four witnesses
on the topic of principal reduction, drawing what several newspapers called
"a line in the sand" about what his bank is willing to do in that
area. He took a similar tack on second
First, he stressed that Chase
borrowers were no more likely to be delinquent on second mortgages than on the
primary loan. He said that Chase data
shows that 97 percent of borrowers in Chase's $98 billion second lien portfolio
are performing on their loans, a percentage that drops only two points when the
borrowers have a loan to value (LTV) exceeding 100 percent.
"Regardless of loan-to-value, he said,
as long as borrowers continue to do the right thing and fulfill their contractual
obligations, second liens that are current and producing cash flow to investors
have value." He also said that second
lien modifications are not an impediment to first lien modifications; that
Chase's HAMP first modification completion rate is virtually the same whether
or not the bank is aware of the existence of a second lien.
Lawson said that a broad-based second-lien principal
reduction plan would reward past consumption by borrowers rather than housing
investment because internal data shows that over 50 percent of borrowers used
home equity loan proceeds for repayment of debt or personal consumption.
Lawson and others referenced the Treasury Department's relatively
new 2MP program that operates in conjunction with HAMP. It will allow servicers to reduce the
interest rate to 1 percent for amortizing and 2 percent for interest only second
mortgages; extend the term of the second lien to 40 years; and requires servicers
to forbear or forgive the same proportion of the second lien as was forborne or
forgiven on the first. They can receive
incentives for doing so. Lawton said
that the program will provide a mechanism for the second lien investor to share
appropriately in the modification process so it does not disproportionately
impact the first lien investor.
Michael Heid, Co-President of Wells Fargo Home Mortgage said
that his bank intends to offer the new FHA refinancing program announced for
"underwater" borrowers last month and that the bank is committed to
ensuring that second liens in its Home Equity Portfolio do not prevent such
refinances from occurring. He said that
Wells Fargo would "closely follow the guidelines of the first lien
investors, including Fannie Mae and Freddie Mac, as the industry sorts out how
to avoid the moral hazard implications that this new public policy option could
Barbara Desoer, President of Bank of America Home Loans said
that some of the bank's investors have taken the approach that second liens
must be totally extinguished before the first lien holder takes any principal
reduction. Currently 15 percent of the 10.4
million first mortgages serviced by Bank of American have a second mortgage
with Bank of America and 16 percent have one with another lender and it has
been the bank's position not to let the presence of such liens prevent
modification of the first lien.
She said that most of the bank's second loans continue to
have collateral value, and of those where the second loan is underwater, a
significant number are still performing.
Of about 2.2 million second liens in the bank's investment portfolio
only about 91,000 or four percent are delinquent, behind a delinquent first
mortgage, and not supported by any equity.
The bank has already written down $10.5 billion of its home equity
portfolio in the last two years.
The Bank was the first to sign on to the 2MP program in
January and on April 1 became the first to begin mailing modification offers to
home equity customers who are in difficulty with their loans.
All four of the banks presenting testimony at the hearing
went to great length to showcase their commitment to loan modifications.
Here are some highlights of their presentations:
Hired 1,400 new employees to support foreclosure
prevention efforts and trained 4,000 to assist borrowers.
During 4th Quarter of 2009, helped
families avoid foreclosure by a ratio of 15 to 1
Assisted more than 825,000 borrowers in efforts
to avoid foreclosure since 2007.
Consistently ranked at or near the top of
Treasury's rankings for the HAMP program.
Opened 37 Chase Homeownership Centers (CNOCs) in
15 states with 15 more planned. These
centers have allowed 91,000 borrowers to meet face-to-face with mortgage
counselors since early 2009.
Hired 3,580 loan modification counselors last
year for a total of 6,258 in 15 sites in addition to the CHOC staff.
Hired additional mortgage operations employees
for a total of 16,000 working exclusively with struggling customers.
Handled over 12.8 million inbound calls from
homeowners seeking foreclosure assistance in the 14 months ending last
Completed 530 discounted sales/donations of
foreclosed properties to non-profits and state and local agencies in 24 states.
Completed 110,175 permanent loan modifications
through HAMP and other programs.
Bank of America
Assisted more than 800,000 customers with loan
modifications in the past two years through HAMP and its own proprietary programs.
Completed 33,000 permanent modifications with
35,000 more pending under HAMP.
Field more than 125,000 calls from distressed
borrowers each day.
Employs more than 16,000 people "dedicated to
default management and loan-modification efforts.
Reduced principal on 50,000 mortgages with a
total reduction of more than $2.6 billion through its own proprietary modification
Initiated more than one-half million
modifications since the beginning of 2009, 75 percent of which were done
outside of HAMP.
Initiated process of having one employee
assigned to a modification from start to finish.
Increased home preservation staff by 135 percent
since the beginning of 2009, adding 10,000 U.S.-based jobs for a total of
17,400 on its home preservation staff.
Participated in more than 300 home preservation
Established 27 Home Preservation Centers in the
six states with the most troubled loans.