Federal regulators implicitly rebutted the view that banks are refusing to take losses on second mortgages that are current but at risk of default.
For one thing, the volume of junior mortgages that are performing but tied to troubled first liens "remains relatively small," the Office of the Comptroller of the Currency and the Office of Thrift Supervision said in a quarterly report on the mortgage market Friday.
The agencies estimated that of the $293 billion of second liens attached to first mortgages, 6%, or less than $18 billion, are current yet standing behind delinquent or modified firsts.
Nevertheless, the agencies said they have stressed to banks and thrifts the need to properly reserve against potential losses on second liens that are in this situation — or, where appropriate, to charge off the loans.
The agencies also said national banks have recognized $43.5 billion of losses from nonperforming second mortgages over the past two years — more than five times the losses recognized over the previous five years.
Second lienholders have been widely blamed for impeding have government efforts to prevent foreclosures through loan modifications and short sales. For example, first lienholders are reluctant to allow mods without the second mortgage also taking a hit. Also, borrowers whose first liens are modified without changes to the second mortgage often redefault because their debt loads remain heavy. And proposed short sales have been scuttled when second lienholders insisted on the right to pursue deficiency judgments.
According to the regulators' report, the performance of second-lien mortgages improved slightly during the second quarter. About $21.7 billion, or 3.7% of second liens held by national banks, were 30 or more days past due at the end of the period.
The analysis encompassed both closed-end second mortgages and home equity lines of credit.