Federal regulators are advising banks that their ownership of a second lien should not influence their decision to modify the first mortgage that they are servicing for other investors.
Banks that service the first and second mortgages on the same residential property may face "potential conflicts of interests," the regulators say in a joint statement.
"A servicer's decision to modify the first mortgage should not be influenced by the potential impact on the subordinated lien and vice versa," according to the Federal Financial Institutions Examination Council (FFIEC) statement.
An investor group recently told Congress that four banks that own $44 billion in second liens also service 55% of all first mortgages. The regulators stress that servicers have an obligation to modify the first lien if it would "produce a greater anticipated recovery" for the investors. "Failure to do so would be a breach of the servicer's obligation to those owners/investors," the FFIEC says.