Shopping for Mortgages
Mortgages

The Critical Hurdle in the Mortgage Delinquency Crisis

(10/06/10)

Second liens remain a giant hurdle that lenders must clear before they are able to resolve the crisis in mortgage defaults. The dilemma in home equity, specifically the lack of it, has made completing both the loan modification and short sale processes very difficult. To the surprise of many mortgage industry observers, in half the cases where borrowers have defaulted on their first mortgage, the second mortgage is still getting paid. The mortgage amounts on second liens are much lower than on firsts and payments are much smaller on second mortgages which may be why a number of borrowers have continued making payments on them even when they can no longer meet the payment obligation on the first mortgage. Of the four largest banks in the nation, over $420 billion in second liens is held of which over 35% have slipped into negative equity territory. Those loans which are "secured" against properties where no equity exists should be re-classified as non-performing and would thereby require a 50% reserve. Lenders could be past the point where they should be re-evaluating the supporting value of the collateral (namely the property) which the mortgage lien is secured against. Regulators have the authority to require that banks beef up their capital reserves against these at risk loans but they have opted not to push for this requirement. In accordance with the Fed and the Office of the Comptroller of the Currency, banks are also required to charge off loans after 180 days when they are not performing as agreed yet regulators have elected to employ a policy of non-enforcement on this as well. Were regulators to force write-downs by the lenders, this would have an adverse impact on capital cushions which banks have been working to restore to healthier levels for the past few years. Unfortunately banks are still not in a position to absorb write-downs without the risk of becoming insolvent at this time. There simply is not a sufficient amount of liquidity in the economy to withstand write downs and the banks would need to turn again to the taxpayers as a back stop.

Other Articles:

Low Rate 15 Year Mortgages Popular Refinancing Choice for Some

Could a Shorter Term Fixed Rate Mortgage Save You Thousands in the Long Term?

FHA 'Short Refi' set to save underwater homeowners

Mortgage Rates Stay Low, Think About Refinancing