Second Mortgages Undermining New FHA Bailout Law

Posted on August 14th, 2008 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research

Second mortgages, sometimes known as HELOCs or HELs, are a killer. They are the true “home ATM machine.” In the banks quest to enable you to extract every last little drop of equity out of your home or purchase with zero money down, our nations largest banks went HELOC-wild in 2005-2007.

Some estimates place the number of outstanding second mortgages as high as $1.3 trillion, or over 10% of all mortgage-related debt. (see bottom of page for an overview of second mortgages)

Our nation’s largest banks including BofA, CITI, Wells Fargo, Chase, WaMu, GMAC, National City, PNC and Wachovia were some of the largest originators of these loans. Wells Fargo owns $84 billion of these for example. And for the most part, they were not sold or securitized and sit as whole loans on bank’s balance sheets awaiting default one by one. This is because a large percentage are now underwater and have become newly unsecured due to the massive house price crash in the past 18-months.

Now, it is being reported by FT.com that these banks are throwing a monkey-wrench into the new FHA bailout law just passed because it calls for the second mortgage holder to get wiped out completely.

“Efforts to avert foreclosures are being complicated by the large number of subprime borrowers who took out second mortgages so they could afford the down payments on their homes, industry executives say.

However, industry executives say secondary lenders are finding ways to stall or derail mortgage renegotiations, employing such methods as delaying the completion of necessary paperwork.

“The second-lien holders have the potential to hold the process hostage because they ask, ‘What’s in it for me?’” said Michael Stevens, senior vice-president with the Conference of State Bank Supervisors.”

FT.com missed the fact that at the last minute the Solons added a provision to the FHA bailout bill where if a second mortgage existed the bank had to waive it. The banks then gets to benefit in the upside along with FHA. They get no immediate monetary benefit, rather a worthless piece of paper and have to waive their rights to a standard judgment, which is not good. I wrote about it when it came out, please see link below.

2nd Lien Provision Added to Housing Bill – Source: National Mortgage News

“Second lien holders could benefit from permitting the refinancing of struggling homeowners under a special Federal Housing Administration foreclosure rescue program contained in a massive housing bill the House is expected to pass Wednesday. A provision added during final negotiations on the bill will allow second lien holders to share in a portion of future appreciation on the property. However, they have to agree to the restructuring and refinancing of the existing first mortgages, which would extinguish any second or subordinated liens…

Mr Mortgage Post on FHA Bailout and Second Mortgages.

Clayton Holdings, a mortgage analytics and benchmarking firm is advising more Government intervention. However, this intervention will require banks to take an immediate loss on these loans, which they do not and have not wanted to acknowledge to date even through it is obvious what dire shape this segment of loans is in.

Keith Johnson, president of Clayton Holdings, which collects mortgage payments, suggested government action might be needed to speed the renegotiating process. “You need a simple, easy, broad-based solution that I don’t know if anyone has really come up with yet,” he said. “You may need regulatory action.”

If you want to see the banks holding this paper and who has the largest exposure see…FITCH – BIG BANKS HOME EQUITY WOES fitch-home-equity-woes20080314.pdf

Source: FT.com Story

MORE ON HOME EQUITY LOANS/LINES

Home Equity Loans are a killer. Remember, this is a $1.1 to 1.3 TRILLION market with the bulk belonging to very few banks such as BofA, Wells, Chase, CITI, Countrywide, WAMU, National City, GMAC and IndyMac. The ‘Home Equity Line/Loan Implosion’ could turn into an entire ordeal in and of itself.

Home Equity Lines of Credit and loans (HELOC, HEL’s, second mortgages) were the true ‘Home ATM Machine’ and could be a big wipe-out for the big banks. These loans were mostly used to avoid Mortgage Insurance on purchase and refinance loans over 80% LTV and went up to 100% of the house value in recent years. As a matter of fact, an appraisal or full documentation was often not required. These loans were very easy to get and primarily relied upon an electronic evaluation of the property value and credit score alone.

They are almost always a total loss when in default. This is because in many cases, the first and second mortgage add up to more than the property is worth, so the second mortgage lender does not get anything in foreclosure – it all goes to the first. As a matter of fact, most second mortgage holders do not even bother with foreclosure proceedings any longer, choosing more traditional means of collection.

A few months back banks began to freeze consumers out of accessing the available credit on the Home Equity Lines. Countrywide kicked if off by freezing 122,000 in one swoop and WAMU follow-up shortly thereafter with a 50,000 line freeze.

Since then, most large named banks have began to freeze lines originated prior to 2008 or with original combined loan-to-values over 80% in regions where property values are substantially dropping. This just so happens to be the regions where these loans were done the most.

This hurt thousands who were not prepared. Many use these lines for highly legitimate purposes such as running a business, college tuition, a rainy-day fund or that brand new Mercedes. Now, the days of extracting all the cash out of your home through Home Equity Lines are gone for good.

This is probably a good thing in the long run, but just as with Jumbo money virtually vanishing overnight, these loans vanishing overnight have reduced housing affordability further, will extend the housing slump and perhaps cause some real damage to consumer spending.

Just recently S&P pulled a slick one. They STOPPED rating second mortgage RMBS citing “anamolous and unprecedented” borrower behavior. Here is a little piece from Bloomberg that enhances the previous story very well, calling all Home Equity loans ‘junk’.

For those of you interested in seeing the Big Banks Exposure to Home Equity Loans, this is a link to the Fitch report. It is ugly. Many of these banks have not yet begun to take write-downs on these loans. FITCH – BIG BANKS HOME EQUITY WOES fitch-home-equity-woes20080314.pdf

11 Responses to “Second Mortgages Undermining New FHA Bailout Law”

  1. Mr. M – Might you have forclosure data broken out by CA counties?

    Still planning on a video posting of July data?

  2. About time. These loans are JUNK.
    I mean it’s not even a real loan!

    It’s based on hypothetical,speculative, subjective, estimations.

    I have one with BOA, but never used it. I guess I never will now.

    On a side note, I’m relatively young but I remmember years ago when I started to learn about loans, and credit..I was completely baffled. I never understood how so much money (mostly based on nothing)could just be lent out so easily.

    Loans are the only thing propping up our lifestyles, businesses, eductions and sadly our country.

    I really can’t wait to see the new movie I.O.U.S.A.

  3. They are listening to Realtors? Guys Fannie just said they had 54k units they were thinking about bulking out…do you think all that is listed? Not.

    The banks list the diamonds with realtors, not the homes that need light or heavy rehab or have health and safety violations. They also try not to list the ones they are too upside down on because ont heir balance sheet they can mark the ‘asset’ at whatever they wish and when they sell for 50% of the original note amount or 30% less than they bought it back from the auction for, it creates a write down.

    The shadow inventory is real.

  4. I have a question, if a HELOC becomes unsecured due to property values dropping, then if someone files for bankruptcy can they keep their home and discharge the debt of the HELOC?

  5. its called ‘lein stripping’ and yes there are ways to do it.

  6. Thanks for the info. I looked it up and it says you can only Lien Strip with a chapter 13 bankruptcy.

  7. Hey Mr. Mortgage,

    Did you ever figure out how to post images?
    I have more in the works if you are interested.
    We really need to put an face on this disaster coming.

    BTW, I remember a post you had on the FHA Bailout law passed regarding HOA fees. Isn’t there a law that will make sure the Lender pay the HOA fees? Can you help me find that clause?

  8. This would explain the massive PUT option buying in WFC (Wells Fargo) at the September 29 strike. Open interest is 75% taken.

  9. “A provision added during final negotiations on the bill will allow second lien holders to share in a portion of future appreciation on the property.”

    What future appreciation? Once your house is back in the money, wouldn’t you sell it, and buy a new one, so you can keep 100% of any future appreciation without having to share with the US government and your bank?

    Or am I missing something?

  10. […] at double-digit inflation as early as 2009 Second Mortgages: Why Absolve Consumers for Stupidity? Second Mortgages Undermining New FHA Bailout Law America’s Fiscal Crisis: Tough Decisions Needed Now Home Equity Frenzy Was a Bank Ad Come […]

  11. If i have a second and third mortage on my property that put me upside down can i file a Chapter 13 and have them removed? What are the requirements and restrictions for this?

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