Principal Reduction Key to Second Lien Mods

While second liens are stumbling blocks in many modifications, when the interests of the first and second mortgages are aligned it often results in a principal reduction, according to Laura Goodman, senior managing director at Amherst Securities Group. "When a bank owns and services the first and second, 37% of those modifications have gotten some kind of principal reduction," she told an American Securitization Forum conference in Washington recently. In an interview she noted these principal reductions occurred on loans on the balance sheets of banks, not securities. Ms. Goodman noted that negative equity is a major problem and it is particularly true for borrowers with second liens. "You can't solve the negative equity problem without writing down the seconds before the firsts," she said. In the nonagency universe, 51% of option ARM borrowers have second liens and 56% of alt-A borrowers have seconds, Ms. Goodman told the ASF conference. Amherst Securities does not have data on Fannie Mae and Freddie Mac guaranteed mortgages with seconds.