Senate Banking Committee Chairman Chris Dodd (D-CT) and House Financial Services Chairman Barney Frank (D-MA) sent a letter to the heads of the bank regulatory agencies asking them to address whether banks are inflating the value of second mortgages on their balance sheets thereby discouraging proactive efforts to modify and restructure mortgage loans.

Across the country housing prices have dropped and many Americans negative equity.  Because they are “underwater,” these homeowners are unable to refinance, leaving them unable to make payments. 

 The HOPE for Homeowners (H4H) program was designed to help Americans stay in their homes by adjusting their mortgages to 90% of the assessed value of their property while helping mortgage companies prevent larger losses they would face if the homes simply went into foreclosure.

One of the significant impediments to the success of H4H is the unwillingness of subordinate lien holders to extinguish their liens as required for participation in this program, even in return for offers of reasonable compensation, said the letter. 

“We understand that the nation’s largest mortgage servicers carry on their balance sheets significant volumes of these subordinate liens in the form of closed-end second mortgages or home equity lines of credit,” said the letter.  “We are concerned that the loss allowances associated with these subordinated liens may be insufficient to realistically and accurately reflect their value, especially in light of the historically poor performance of first lien mortgages and seriously diminished values of the underlying collateral. As you know, the nation has experienced sharp declines in home prices, with further declines expected in many markets. This has resulted in as many as 20 percent of all homeowners having mortgages that exceed the value of the home. These numbers are likely to be much higher in the case of option ARMs and subprime loans.

“Many subordinate liens stand behind these mortgages. Carrying these loans at potentially inflated values may contribute to resistance on the part of servicers to negotiate the disposition of these liens, and thus may stand in the way of increasing participation in the H4H program.  Inadequate reserving would also overstate the capital position of these institutions at a time when an accurate picture of the capital adequacy of the banking system is crucial.”

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