Who’s On First? (First Or Second Mortgage Holders?)
Dolors & Sense
by Sanford Rose
KISSIMMEE, FL—(Weekly Hubris)—9/27/10—No I’m not about to reprise the famous Abbott & Costello skit of the 1940’s. But the situation is certainly farcical. It is the long-running fight between holders of first and second mortgages on US homes.
When the holders are the same, mortgages tend to get modified with the kind of relief that has staying power—that is, principal forgiveness. That’s because, looking at all parts of the credit package, the lender can usually see that this is the way to preserve maximum loan value, which is still low value but more than can be extracted by doing the kind of loan modification that just delays for a few months an inevitable default.
Unfortunately, the usual situation is one in which a mortgage servicer (generally a big bank) is collecting payments on both the first and second mortgages, but owns only the second, having already securitized the first.
In such circumstances, there is an inherent conflict of interest, bordering on fraud. If the servicer cuts the amount of loan principal, he may save the loan and benefit the owner-investor of that loan. But that action may extinguish the property rights of the holder of the second mortgage.
Since the servicer is in fact the owner of the second mortgage, but only the agent of the owner of the first mortgage, he is not apt to take this step.
Instead, he is more likely to modify only the interest rate on the loan, an action that protects the interest of the second mortgage holder—at least for a while—but does little to prevent the borrower from eventually going into default, which of course mightily prejudices the property rights of the holder of the first mortgage.
Although the situation has been somewhat addressed by Administration action in recent months, the basic problem persists: many loan modifications that could have prevented foreclosures are not being done because of the equivocation of servicers in compromised positions.
The interest of the “what” on second is trumping the interest of the “who” on first.
And “who” is really suffering? Us. The country.
Sanford Rose
Sanford Rose, of New Jersey and Florida, served as Associate Editor of Fortune Magazine from 1968 till 1972; Vice President of Chase Manhattan Bank in 1972; Senior Editor of Fortune between 1972 and 1979; and Associate Editor, Financial Editor and Senior Columnist of American Banker newspaper between 1979 and 1991. From 1991 till 2001, Rose worked as a consultant in the banking industry and a professional ghost writer in the field of finance. He has also taught as an adjunct professor of banking at Columbia University and an adjunct instructor of economics at New York University. He states that he left gainful employment in 2001 to concentrate on gain-less investing. (A lifelong photo-phobe, Rose also claims that the head shot accompanying his Weekly Hubris columns is not his own, but belongs, instead, to a skilled woodworker residing in South Carolina.)