Junior lenders to blame for re-defaults?

February 04, 2010 04:13PM

The culprit behind the limited success of loan modifications may have nothing to do with complex paperwork, after all. Instead, many housing experts say, second mortgages — like home equity loans and lines of credit — are largely to blame. The Wall Street Journal reported that commercial banks, savings institutions and credit unions hold $963 billion in second mortgages with $442 billion of that on the balance sheets of the nation’s four largest banks. Because second mortgages are supposed to take the first loss on a property in the event of a modification or short sale, many are essentially worthless at a time when so many American homeowners are underwater and banks are, unsurprisingly, reluctant to write them down. If second mortgages were modified, too, the threat of re-default might loom less large, said Laurie Goodman, a mortgage analyst at Amherst Securities. Second mortgages have also been slowing the success of short sales, brokers have reported, as banks holding the second lien on a property often refuse to approve the deal. [WSJ]