Treasury floated (could be testing the waters) a new program that provides new incentives to second lienholders. During the mortgage lending boom "no-downpayment" loans and "piggyback" loans were aggressively pushed. Obviously, these second mortgage loans were to compensate for no-downpayment or low downpayment. At the time, mortgage lenders didn't care about adding a second mortgage lien on residential property because real estate prices "always" go up. Then reality set in.
But those loans, which are attached to about half of all troubled mortgages, have been an obstacle to efforts to alleviate the housing crisis. That's because borrowers who are trying to get their primary mortgage modified at a lower monthly payment need the permission of the company holding the second mortgage.
So the second lien holders is crucial to the success of President Obama's plan to modify troubled mortgages.
Under President Obama's plan a second lien holder would get $500 upfront for each modified loan, plus $250 a year for three years as long as the borrower doesn't default. Not a problem so far.
Until you realize who the mortgage servicers are and who the second mortgage lien holders are. A mortgage servicer is essentially a middle party between borrower and party that owns mortgage. A mortgage servicer is responsible for collecting monthly loan payments from borrower and passing those payments to the mortgage holders (first and second mortgages).
The top mortgage servicers that account for over 50% of all mortgage loans: Bank of America, JP Morgan Chase, Wells Fargo, Citigroup and a company called American Home Mortgage Investment Corp. (more on them in a moment). Guess who owns the second mortgages? If you guessed me you are sadly mistaken:
[Bank of American and JP Morgan Chase] along with Wells Fargo & Co. and Citigroup Inc., the top four U.S. first-mortgage servicers, will face conflicts because they own $441 billion of second-lien home- equity lines and loans along with overseeing $6.1 trillion of home loans, mostly for other investors or guarantors, Amherst’s Laurie Goodman and Roger Ashworth wrote in a report yesterday.
Wow, now if that is not double-dealing, double-dipping and a huge conflict of interest I don't know what is. Under President Obama's plan mortgage servicers (financial conglomerates) get an incentive for successfully obtaining a mortgage modification. Second Lien holders (financial conglomerates) get an incentive for agreeing to modify its loan. The financial conglomerates get another huge bailout.
As for American Home Mortgage Investment Corp., the other big mortgage servicer, it was purchased by WL Ross & Co., a private equity firm, in October 2007. American Home Mortgage services mostly subprime mortgages and "Alt-A" mortgages. Interestly, at the time of the purchase finance people thought it was a good deal for WL Ross & Co. but I doubt that is the case now. The following may be entirely coincidental and it could be a matter of "tin foilery" but:
1) Yesterday: WL Ross & Co. to invest $1 billion in Geithner's PPIP
2) Today: Treasury announces new plan to provide more incentives to mortgage servicers such WL Ross & Co's American Home Mortgage.
Ok, maybe that is a stretch and just an interesting coincidence. But the fact remains that financial conglomerates are benefiting from all angles in these various bailout plans. I understand that some benefit or incentive is necessary but the financial conglomerates have the finger prints all over this financial crisis and they are the ones benefiting the most from the various bailout plans.
I believed from the beginning that the focus should have been on addressing the core of the problem: residential mortgages. Aggressively addressing ways to keep people in their homes and avoiding foreclosure or abandoning homes. This would have included reducing principal and interest. Many people would say that this is a potential "moral hazard" and rewarding poor decision. I would argue that individuals bad experiences (stress and the like) and punishment (destruction of credit history w/stigma of foreclosure) is enough to change people's behavior in the future. I can't say the same for financial conglomerates - they never learn.