Consumer Law

Second Mortgage Problems

By M. Stan Herring

The CL&P Blog has posted an article that discusses the problems with homes that have two mortgages facing foreclosure. First mortgages are usually held by investors in "mortgage backed securities" whereas second mortgages are held by "banks on their own balance sheet."

If the major banks were honest about the value of their home equity debt, their capital would take a huge hit. At a time when the banks are repaying Treasury?s equity investments, they do not want to expose this fundamental weakness in their balance sheets. Bloomberg reports that the four big banks, who are also the largest servicers of investor-owned first mortgages, have a combined total of $450 billion in home equity debt on their own books.

Banks seem to be the primary problem when it comes to write-downs in second mortgages.

Bank of America, for example, has $150 billion in home equity debt, and 50% of it is underwater, or nearly, although most borrowers are still making payments, so far. BofA estimates that half of the home equity debt is on homes with total first and second mortgage debt exceeding 90% of the home value. This at a point when its tier I capital was $191 billion. Total loss provisioning for this portfolio was 6.4%, or about $10 billion, a figure that is clearly inadequate. Large write-offs of BofA?s $150 billion home equity assets would take a big bite out of its capital base.

The Treasury is working on a plan to get second mortgage owners to accept 15 cents on the dollar...but banks are reluctant to cooperate. The current Bankruptcy Code allows homeowners to get rid of second mortgages if the first mortgage as eaten up all home equity. However, few homeowners take advantage of this and instead resort to bankruptcy.

If you would like more information about foreclosure, please check out our articles: The Three Stages of Foreclosure in Alabama and Wrongful Foreclosure in Alabama.

If you have more questions, feel free to contact us through our website or by calling 205-879-2447.

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Full post as published by Alabama Consumer Blog on January 22, 2010 (boomark / email).