Political Pressure Bears Fruit on Second Liens

Congressional and governmental pressure to force servicers into modifying and reducing the principal on troubled second mortgages is having its desired effect.

Thanks to some well-placed political heat, the nation's top four ranked servicers of residential loans have vowed to Congress that they are already using-or will soon use-principal reductions to help struggling homeowners, but on a case-by-case basis.

The four-Wells Fargo, Bank of America, JPMorgan Chase and CitiMortgage-are now on the record saying they support recent changes to the government's Home Affordable Modification Program and its fledging second-lien modification program (2MP). Combined, the four control 60% of the receivables market in the U.S., according to figures compiled by this newspaper and the Quarterly Data Report. "We expect these changes will result in more principal reductions going forward," said Sanjiv Das, president and chief executive of Citi Mortgage.

House Financial Services Committee chairman Barney Frank, D-Mass., recently summoned executives of the four to Capitol Hill. For well over a year the chairman has been complaining that the banks were an obstacle to modifying first mortgages because they would not modify or take a writedown on seconds held in their massive portfolios.

Two Democratic congressmen recently introduced a bill that would prohibit banks from servicing first mortgages if they hold a second lien on the same property. Democratic Reps. Brad Miller (N.C.) and Keith Ellison (Minn.) contend the servicers are reluctant to modify certain loans because of this "irreconcilable conflict of interest."

Wells Fargo Home Mortgage co-president Michael Heid testified that his company has completed 50,000 principal forgiveness mods as the first-lien holder in 2009. "We did not condition that based upon what the second-lien holder did," he added. In opposing the Miller-Ellison bill, Heid said all servicers have an obligation to service the first mortgage appropriately. "I do not believe it is appropriate to legislate this matter."

Under questioning from Chairman Frank, the executives testified that they will accept proportional mods on their second liens under the new 2MP guidelines when the first is modified or the principal is reduced.

Bank of America Home Loans' president Barbara Desoer noted that new 2MP guidelines issued in late March do not specially require principal reduction. However, principal reduction is part of the program's internal "logic," she said. "Our recommendation is to further advance the 2MP from principal forbearance on a shared percentage basis across the first and the second-to principal forgiveness."

David Lowman, chief executive of Chase Home Lending, also agreed to modify or reduce the principal on Chase second liens in proportion to the first mortgage. Chase has offered 54,000 second-lien borrowers a mod in 2009 and 12,000 are now permanent.

Lowman said Chase is using principal reductions to help borrowers who are current on their conventional loans refinance into Federal Housing Administration-insured loans. This summer, Chase will offer delinquent borrowers a refi option through the FHA Hope for Homeowners program if they need a principal reduction or a second lien extinguished. Chase also is developing a principal reduction program for payment-option borrowers and conducting targeted tests to see if principal reduction is effective for "other high-risk borrowers," Lowman said.

"Once we observe the results of these tests, we will be able to better evaluate the effectiveness of a broader principal reduction program," the Chase executive said. Frank was quite pleased by the testimony. He noted that calling a hearing can produce results.