JPMorgan Chase this week became the latest big bank to say it is willing to modify second mortgages for some struggling borrowers. It can be termed as baby step as we had seen a continuous neglect by lenders to modify second mortgages. They had frowned upon this idea for long time. As we know, most of the homes in Nevada has a second loan which are called junior liens in legal language and they are subordinate to the first loan.
Most of the homeowners who are behind on their first mortgage payments are also behind on their second mortgage payments. All the modification programs by federal government only has tackled first mortgages . The Home Affordable Modification Program, which is intended to ease mortgage payment reductions, is aimed at several million struggling borrowers. Of 1.4 million trial modifications offered so far, only 170,000 have resulted in adjustments that the program calls “permanent.” In reality, even after modification many borrowers are still overburdened, and further defaults look inevitable.
That ought to focus banks’ attention on their second-lien loans. There may be little or no chance many of them will ever be repaid. But banks have avoided writing down second liens because accounting rules allow them to consider the loans performing so long as borrowers make interest payments. It’s easy to understand why the banks are avoiding the issue. According to Amherst Securities, of $1.05 trillion in outstanding second liens, commercial banks hold $767 billion. Bank of America, Citigroup, JPMorgan Chase and Wells Fargo alone hold $442 billion of them.
A government modification program for second liens, known as 2MP, was first put forward a year ago. But Bank of America, Wells Fargo and now JPMorgan Chase have only recently joined. It is not likely to reach many borrowers since it focuses on only those few who do “permanent” modifications under the federally sponsored program. Assuming around half of distressed homeowners have second mortgages, this would cover some 85,000 second liens, of the millions that are outstanding.