WASHINGTON (Reuters) – The Treasury Department is considering giving banks and investors billions of dollars in fresh incentives to modify troubled mortgages and save homeowners from foreclosure, sources familiar with official deliberations said.
Under one scenario, investors in second liens would receive a cash payment if they agree to ease the terms of troubled loans and accept a smaller return on their mortgage investment, the sources said.
During the height of the housing boom, some borrowers were able to buy a home with no downpayment by adding a second lien and many of those loans are now failing as the economy and housing market struggle.
Some on Wall Street will likely be angry if Washington doles out money to investors who hold the high-risk end of a home loan.
“Second-lien holders should get zero,” said Bill Frey, president of Greenwich Financial Services in Greenwich, Connecticut. “Why should a second lien holder get anything if the first lien holder takes a loss? That’s not the way the contracts work, that’s not the way privatization works, that’s not the way America works.”
OTHER AID
Officials also envision giving fresh subsidies to encourage ‘short sales’ in which the lender accepts a payment that does not cover the entire loan amount, according to the sources, who requested anonymity because they are not authorized to disclose details.
Fannie Mae and Freddie Mac, the mortgage finance companies, would administer the new program to resolve problems with second-liens under one plan being considered, they said.
A senior administration official declined to comment on Tuesday, but said the Treasury expected to unveil further details of its homeowner-aid program “soon.”
The official said the Treasury Department is also considering ways it could resolve problems in the mortgage insurance industry battered by mounting foreclosure losses.
“We are aware of the difficulties in the industry and we are analyzing different options to deal with” those difficulties, the official said.
In February, President Obama outlined a housing rescue plan that he said could move as many as nine million homeowners into more-affordable loans by both refinancing and modifying their current mortgage.
Homeowners normally must settle all of a home’s debts when they refinance a mortgage but a modified loan may hold the second lien in place.
A bulk of the Obama housing rescue plan involves modifying loans but officials have decided that they will try to ease those second lien payments in order to ease the costs of homeownership, the official said.
“Their debt overhang will be brought down,” the official said. “We will have that program shortly.”
Must be nice to be a bank.
Okay, I’m getting very confused. I always thought that the lienholders–other than the first, were considered (A) riskier because (B) if there was a default situation, they have to “stand in line” (in proper order) to get paid–if they got paid at all. And that (3) they usually only “got paid” if THEY outbid the 1st, paid them off and then tried to flip the house to recoup some of their money.
But in this environment we all know that most of these homes are already underwater, so the second or thirds trying this tact would be –shall we say–insane.
When a property goes into foreclosure, if only the first lienholder buys it back (i.e., there are no higher bidders), then tax liens and contractor liens have to be paid by the 1st holder and, it’s my understanding, all other liens are wiped out.
But apparently, I am learning, this only wipes out the NEW owners’ liability; the debt is still there (?) yet it is no longer tied to the property. So the ORIGINAL homeowner may still be on the line to pay a debt on a home they no longer own.
It seems to me that all these banks that made these “generous” and yes, risky loans should not be bailed out anymore, unless they are going to wipe out the debt from the (previous/original) owner.
These banks having their cake (getting a break from the government) AND eating it too (still being able to go after no-longer-homeowners) is really going to get the pitchfork sales into their own bubble territory!
Bailouts, shady, unethical dealing, and now this.
That’s it. As a potential buyer (or at least I was one), I’m waving the white flag. I give up. It’s not worth the pain.
God, I’m such a live within your means working for a company that doesn’t somehow qualify as a bank/holding company kind of sap.
I guess the freddie mac cfo took himself out today.the books must be really cooked.
Hello Jim,
By Every couple of months do you mean, Another round of smoke & mirrors?
I can just see the banks planning to siphon off more bonus money. Why not just give every homeowner 100K instead- but wait, what about the renters?…and the homeless? Don’t they “deserve” money too?
arizonadude-Yeah, that’s not a good sign for a company when the CFO blows his brains out.
If the payments are given to encourage short sales.. Not such a bad thing.
If the payments are given to encourage loan mods.. kicks the can down the road.
Can we just please have the required foreclosures already? Sheesh!
The dirty secret is that all the banks hold each others’ second lien debt. It may look like 80/20 spreads risk but in aggregate they effectively all have blended 100% CLTV exposure.
I suggest that they all get around the table and start trading paper until they’ve matched up all the 1sts and 2nds.
I love the government is willing to do everything other than allow bubble prices to drop. Good luck with that!
In a perverse way, this is rather analagous to amnesty for illegal immigrants. I don’t have anything against illegal immigrants, but hell if they’re going to get in line when millions of people from hundreds of other countries can’t get in legally. This is all about rewarding the least deserving people at the expense of everyone else who did right.
Like everything else the government does, this’ll only aggravate the crisis and thus guarantee a lower bottom further out.
“Why should a second lien holder get anything if the first lien holder takes a loss? That’s not the way the contracts work, that’s not the way privatization works, that’s not the way America works.”
How exactly does America “work”? We don’t. The system is broken and has been for a long time. AIG gets bonuses, that doesn’t “work”. So a plan to get 2nd lien holders to actually cooperate in Short Sales when there is a willing buyer and seller? What’s wrong with that?
I think free for all short selling would show us the bottom a lot sooner than enormously lengthy foreclosures…. just look at Jim’s “shadow inventory” reports. Short sales are Loan Mods… the principal gets written down… but it’s a brand new homeowner.
ANYTHING the government can do to encourage this is good IMHO
by the way… in short sales the homes won’t be destroyed either. we avoid blights in communities, crime, horrendous “comps”, etc.
The bank balance sheets are dictated by Wall St. They can’t afford to record so many losses at once. They need to spread them out over time (maybe a couple years) to show earnings every quarter. They’re also allowed to use mark-to-market accounting because of this. If the banks don’t show profits the market falls further. The banks need to recover to get the economy going again.
Meanwhile, my patience is further tested.
A LOT of sales would not have happened without these 2nd liens-I think the 1st lien holders do owe them something. If the 1st holders are ending up with 40-60%, there could be some kind of sliding scale where second liens get 20-40%.