AMI: Second-Lien Holders Must Confront Conflicts Of Interest

A new statement from the Association of Mortgage Investors (AMI) calls on banks to be more transparent in accounting their second-lien modifications where they own first and second liens on the same property.

The statement, which was not attributed to a single person but to the AMI as a whole, was issued in response to first-quarter earnings reports from Bank of America, Citigroup, JPMorgan Chase and Wells Fargo – the four biggest holders second-lien mortgage holders.

‘Each of the big four banks earned multiple billions in net profits this quarter. Their substantial profits are a positive sign for the economy, but foreclosure numbers and consumer debt levels indicate the recession is not over on Main Street," the AMI says.

For the recently announced revisions to the Home Affordable Modification Program (HAMP) and the Federal Housing Administration's refinance programs to succeed, the banks must stop shifting mortgage losses to first-lien investors and "confront their conflicts of interest," the group says.

"The banks remain conflicted by their massive investments in portfolios of home equity loans and lines of credit and servicing fees," the statement reads. "While they have aggressively modified first-mortgage debt, they have done little to nothing on second-mortgage debt, which they own. This has resulted in homeowners remaining deeply in debt with second mortgages that continue to exceed the current value of their home."

Bank of America, Citi, Chase and Wells Fargo held roughly $419 billion of second liens on their balance sheets as of the end of last year.

The AMI says the current HAMP structure improves the cashflow available to the second mortgage at the expense of the first mortgage and defers the immediate loss that would be recognized in a foreclosure, short sale or short refinance. The group also notes that the four banks have committed to the government's Second Lien Modification Program, but that the one-year old program has yet to be implemented.

In addition to encouraging the banks to write down principal on second liens, the AMI proposes the following:

  • Appointing special servicers in situations where the bank-owned servicer has a conflict;
  • revising safe harbor to only work when debt reductions are shared by all creditors;
  • allowing investor-appointed third parties to review loan files for violations of representations and warranties; and
  • creating an "all-encompassing homeowner restructuring framework," which the AMI did not define in its release.

SOURCE: Association of Mortgage Investors


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