The top four holders of second mortgages are now on board, but a government program to modify such loans in tandem with first liens will not be up and running for five months.
A big part of the hold-up is the old problem of one hand not knowing what the other is doing.
Home equity loans typically are not originated or tracked through the same platforms that banks use for servicing a first mortgage. So a bank that holds the first lien may not even know internally that it also holds a second lien.
"It's astonishing, but the technology is not in place," said Shelley Leonard, a senior vice president of consumer lending strategy at Lender Processing Services, which has a contract with the Treasury Department to match first and second liens."When you're on the servicing side, you operate in a separate silo, so the reporting is separate, and there are a number of hindrances for allowing that transparency to occur."
The program, which the Treasury announced last April, is being closely watched because second-lien holders' reluctance to take losses has been a major obstacle to the effort to restructure troubled homeowners' debt.
On Thursday, Citigroup Inc. became the last of the Big Four to sign up for the Second Lien Modification Program, or 2MP. JPMorgan Chase, Bank of America Corp. and Wells Fargo had previously announced they would participate.
The four companies collectively own more than $400 billion in second liens, based on fourth-quarter filings.
Mods that reduce the payment on a first mortgage without addressing the second can fail because the consumer's overall debt burden remains too heavy. And holders of the first mortgages are reluctant to take losses unless the second-lien holders do too.
But second-lien holders have been largely unwilling to take hits, in part because their loans are often still paying as the same borrowers default on their first mortgages.
Brian Moynihan, Bank of America's CEO, recently pushed back against the idea that BofA's home equity portfolio "has to be all impaired," which he said was a widely held view.
In a March 10 presentation, Moynihan said about two-thirds of the loans are backed by homes that are worth more, at current market prices, than the first lien and second lien combined.
"The home equity product by definition is a product for more affluent people," he said.
The company stands to continue to lose money on the business "for a number of quarters," Moynihan said, but "we're comfortable that that is not a huge issue for us."
If successful, 2MP could be a breakthrough for loan mods. The Treasury still needs to release updated guidelines for the program. Those could come any time now.
The technological hurdles, however, are the "potential juggernaut," said Leonard at Lender Processing.
Under 2MP, borrowers may get the interest rate on their second mortgage reduced to 1% for five years — but only after completing a trial modification on their first mortgage through the better-known Home Affordable Modification Program (HAMP).
Leonard's company, under its government contract, alerts second-lien holders when a first mortgage has been changed under HAMP.
But the vendor does not do so when the same company services the first mortgage and holds the second.
The Treasury has told servicers to rely on "internal mechanisms" to figure out if they hold both liens, Leonard said. Trouble is, such mechanisms do not exist, she said.
Rick Simon, a spokesman for BofA, said the Treasury will not be "operationally ready for the program until August."
Mary Berg, a Wells Fargo spokeswoman, said that "a few things need to happen before we can start providing it to customers. We're working as quickly as we can, but we're still in the implementation phase." Wells Fargo has not identified how many borrowers will be eligible for 2MP or how many that have had permanent modifications also have a second lien, she said.
Citi, JPMorgan Chase and the Treasury did not return calls Thursday.
During a presentation this month, SunTrust Banks CEO James Wells 3rd said he was uncertain about the potential consequences of House Financial Services Committee Chairman Barney Frank's March 4 letter to the nation's four largest mortgage lenders urging them to forgive principal on second liens to troubled borrowers.
"It's hard to say actually what will end up happening specifically as a result of anybody's belief about equity loans having to be cast aside when first mortgage loans are mitigated," he said.
Wells said that "a good deal of our equity portfolio … obviously has little or no value, and particularly in certain places in Florida," but that SunTrust believes it has already recognized such losses.
Leonard said one reason technology has not been a big issue until now is that banks "haven't been modifying seconds in large volume and they haven't done any under Hamp. They're flying under the radar as long as they can because borrowers are still paying the second."