"How big a hit should US banks take on their second mortgage portfolio?
A question that’s been asked again and again (and again and again) by this blog and others. Regulators are worried: Bloomberg reported last month that the Fed and the OCC are checking whether banks have put aside enough reserves to cover losses.
The second mortgage problem is, in theory, fairly simple. During the housing boom, some mortgage holders used their (increasingly valuable) house as collateral for a home equity loan to pay for another home, college fees, and so on. If, following the housing market crash and the recession, they now go into delinquency or default, the lender of the first mortgage should be senior and receive first claim on the remaining assets. The second lender can be left with little or nothing if the value of the home has fallen under the amount of the first loan. In this case the holders of these mortgages should ‘fess up and set aside the corresponding loan loss reserves.
However, this is a mash-up between the US housing market and financial system, so few things are straightforward. The Treasury’s maligned Hamp programme in effect switched the priority order. Banks are some of the biggest holders of second mortgages and there’s little incentive for them to collaborate with first mortgage holders. In many cases banks are also mortgage servicers so there’s even less incentive for them to take losses on second mortgages. Indeed, in many cases, servicers were reported to be pushing for second lien payment even when the first was not forthcoming. Thus there’s not been a lot of writing down going down, hence the regulators’ concern..."
at http://ftalphaville.ft.com/blog/2011/10/10/696591/the-mystery-of-us-banks-second-mortgage-exposure/
A question that’s been asked again and again (and again and again) by this blog and others. Regulators are worried: Bloomberg reported last month that the Fed and the OCC are checking whether banks have put aside enough reserves to cover losses.
The second mortgage problem is, in theory, fairly simple. During the housing boom, some mortgage holders used their (increasingly valuable) house as collateral for a home equity loan to pay for another home, college fees, and so on. If, following the housing market crash and the recession, they now go into delinquency or default, the lender of the first mortgage should be senior and receive first claim on the remaining assets. The second lender can be left with little or nothing if the value of the home has fallen under the amount of the first loan. In this case the holders of these mortgages should ‘fess up and set aside the corresponding loan loss reserves.
However, this is a mash-up between the US housing market and financial system, so few things are straightforward. The Treasury’s maligned Hamp programme in effect switched the priority order. Banks are some of the biggest holders of second mortgages and there’s little incentive for them to collaborate with first mortgage holders. In many cases banks are also mortgage servicers so there’s even less incentive for them to take losses on second mortgages. Indeed, in many cases, servicers were reported to be pushing for second lien payment even when the first was not forthcoming. Thus there’s not been a lot of writing down going down, hence the regulators’ concern..."
at http://ftalphaville.ft.com/blog/2011/10/10/696591/the-mystery-of-us-banks-second-mortgage-exposure/
