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Banks See Poor Second Mortgage Loan Performance

The second mortgage defaults continue to rise. A few years ago borrowers were using second mortgages or home equity loans to consolidate credit card debt.  They were also used to heavily in purchase mortgage transactions in order to avoid mortgage insurance.  80-20 loans were the no money down loan combinations that enabled borrowers to get 100% financing.  There was a day not too long ago that second mortgages rarely defaulted, but as the mortgage market crashed so did the will of borrowers to pay their 2nd mortgage.  Second mortgage lenders occupy the subordinate position in the debt stack on your home mortgage are finding out that being No. 2, quite frankly, sucks big time.  Prior to 2007, money was easy to access and banks also were happy to extend second mortgage loans and lines of credit to single-family homeowners.  It was as easy as walking into a bank empty-handed and out another with a toaster and home equity loan.  Since credit flowed like water, banks were equally happy to do an 80-20 loan, which was basically a first mortgage for 80 % of the value of a home plus a second mortgage for the remaining 20%. Whoopee, no money down for the borrower.

Now it’s time for banks to pay the piper. Here’s the big problem: If the home value is underwater or the homeowners are having trouble paying bills, the holder of the second mortgage or home equity loan doesn’t get paid back until after the holder of the first loan, which in those two scenarios almost never happens.  Those 80-20 loans by definition meant the loan-to-value was high, high, high, and now that home values have declined, collecting any money for the second-lien holder is slim at best.  If there is a Home Affordable Modification Program procedure or a short sale, the second mortgage holder also gets wiped out. Needless to say, second-lien holders are in no rush to see loan modification plans completed or jump into short sales, both of which would mean writing down the loans as full losses.  At most banks, second mortgage loans, no matter how precarious, for as long as possible are carried on the books at full value — a bit of a fiction, but it does make the banks look better.

In March, Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, openly called for the major banks to start writing down second mortgages. His point being, reported the Wall Street Journal, was “the banks’ reluctance to write down second mortgages is hurting efforts to reduce the first-lien mortgage balances of many borrowers who owe far more on their loans than the current value of their homes.”  Indeed, one new change for the Obama administration’s HAMP is that borrowers who get reduced payments on the first mortgage through HAMP would automatically get a break on the second lien as well. Underneath all the politics, however, are some serious problems in regard to home equity loans:

Delinquencies are rising very rapidly.  Historically, “delinquencies on home equity loans have been very low, but all that changed last year.”  In 2005 and 2006, delinquency rates for home equity loans and home equity lines of credit remained under 1%. By the end of 2008, the delinquency rate for home equity loans crept above 2%. Then, over the course of 2009 those numbers vaulted to 5%, a major leap in percentage.   “Most of the gain was in a one-year period,” Leonard reiterates. “That’s a huge pick-up in delinquency.”  The curve of home equity loan delinquencies mirrors that of the unemployment rate. Leonard suspects delinquencies will stay high as long as unemployment rates hover around 10% or climb higher.  As a result of home equity loan delinquencies, banks have taken some very large charge-offs. Net charge-off rates increased by 50% among the top five banks in 2009. Without naming names, Leonard said she knows one of the largest lenders of home equity loans took a $4 billion charge-off last year.  Read the original article >

Posted in 2nd Mortgage Tips, Home Equity News, Mortgage News, Published Loan Articles, Second Mortgage Modification, Second Mortgage Updates. Tagged with , .

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