Federal regulators implicitly rebutted the view that banks are refusing to take losses on second mortgages that are current but at risk of default.
For one thing, the volume of junior mortgages that are performing but tied to troubled first liens "remains relatively small," the Office of the Comptroller of the Currency and the Office of Thrift Supervision said in a new report.
The agencies estimated that of the $293 billion of second liens attached to first mortgages, 6%, or less than $18 billion, are current yet standing behind delinquent or modified firsts.
Nevertheless, the agencies said they have stressed to banks and thrifts the need to properly reserve against potential losses on second liens that are in this situation — or, where appropriate, to charge off the loans.
The agencies also said national banks have recognized $43.5 billion of losses from nonperforming second mortgages over the past two years — more than five times the losses recognized over the previous five years.
Second lienholders have been widely blamed for impeding government efforts to prevent foreclosures through loan modifications and short sales.
