I have to figure that the banks will find a way to extend and pretend or somehow get these loans refinanced and passed onto the GSE’s. Just too much money (and bonus $$) riding on it.
What stops the banks from simply making a new 10 year HELOC? Regulators don’t seem to care and I’m sure the banks can come up with a “model” to show that the new loans are good.
Many of these mortgages would seem effectively worthless, because a home equity line of credit or second mortgage on top of an already deeply underwater first mortgage has no value
Nothing is going to happen here. 80 Billion a month is QE has solved this, and now the government owns it and they will cook the books to make it look like someone else owns it or never actually acknowledge it. It’s brilliant.
The amount of second liens is likely to come home to roost gradually enough now for the banks to be able to deal with it.
But this has nothing to do with QE. QE gooses MBS, as in bond prices. These are on balance sheet loans, a completely different category.
Bank of America says that these loans are worth 93 cents on the dollar
Over the past three years, NC payday loans the big four servicers have been keeping hundreds of billions of dollars of second mortgages on their books (mostly in the form of Home Equity Lines of Credit, or HELOCs). You can’t use it to foreclose, because you’d get nothing out of the foreclosure – all of that would go to the first mortgage holder (usually some investor in a pension fund somewhere). It has only “hostage value”, or the ability to stop a modification or write-down from happening. The best way to clean up this situation is to have the regulators (FDIC, OCC, Federal Reserve) simply tell the banks that they must write down their second mortgages on collateral that has been impaired. That way, the incentive problem goes away. By forcing the bank to recognize the loss now, the bank will no longer stop a modification on a first mortgage. And in fact, the regulators pretty much agreed that this is what their examiners should do, when they issued new rules earlier this year on accounting for second liens.
Only, the regulators haven’t done it, because the banks claim their seconds are performing. Several of the other banks don’t break out their loss reserves for seconds, so it’s hard to tell, but I think it’s clear they aren’t reserving enough. We can tell that because the Federal Reserve itself is dramatically overvaluing these seconds. In a stress test, the Fed said in its worst case scenario that the banks would lose only “$56 billion”. These are low numbers. According to their most recent investor report, Wells Fargo alone has $35 billion of second liens behind first mortgages that are underwater.
Investor appetite for homes has been cooling, in part due to concerns about QE taper, in part due to one of the hoped-for exit strategies, that of turning a portfolio into a REIT and taking it public, looks to be pretty much dead. And reports of bad maintenance and tenant abuses by the kingpin investor in rentals, Blackstone, could also put a pall over the category, even for more responsible operators. So even a bit more uptick in supply due to HELOC-shock sales, short sales, and foreclosures, could put another dent in the faltering housing recovery.
This is and always has been a painful enactment of trivial gains in the hands of people who are simply cogs in a faltering machine.
this has the potential to be a major, major issue. Yves correctly noted that Bank of America had a significant exposure to the mortgage market, particularly second leins. It’s been some time since I looked at the numbers (though I doubt they’ve changed materially) but at one point BAC had more in second leins alone than they had in equity on their balance sheet. Now, not all of these seconds are worthless, but carrying them at 93 cents on the dollar when they should be much, much lower means that forcing a writedown is going to wipe out the equity of some of these companies (not that that’s necessarily a bad thing).