Equity Home Mortgages Cause Problems for Large Scale Loan Modifications
As part of the House Committee on Financial Services congressional hearing held on April 13, 2010, four of the leading U.S. equity home mortgage lenders testified against blanket reductions to the principal amount of a mortgage loan. While J.P. Morgan & Chase, Bank of America Home Loans, Wells Fargo Home Mortgage, and Citi Bank all report varied success with mortgage modification programs, most of the modifications help homeowners with the first loan on the property. As of the hearing, what to do with an equity home loan remained a problem. According to Barbara Desoer, the president of Bank of America Home Loans, the company has modified some first liens without considering the second lien if another lender held the equity home loan.
Part of the problem with modifying a secondary lien stems from mortgage lenders' reports indicating over 90% of customers with a home equity loan are current on the payments. According to Housing Watch, the leading banks own approximately 42% of second liens, totaling around $1.1 trillion. Large scale modifications to equity home mortgage loans could cause serious financial damage to the banks. Adding to the problem is the legal regulations covering equity loans. Lenders holding the first lien on a property have the primary right to it, which can force a secondary lien holder to swallow the entire loss when a primary lender modifies an existing mortgage.
Even though the majority of home owners with equity home mortgage loans remain current on repayment, some financial professionals expect problems to occur as more primary loans undergo modification. CreditSights, Inc., a financial analysis firm, estimated some of the major lenders holding equity home mortgage loans could lose up to $30 billion. Regardless of the warning, the testimony indicated the financial leaders had put equity home mortgage loans on the back burner.