WASHINGTON — The chairmen of the House and Senate banking committees are prodding bank regulators to apply pressure on mortgage servicers to cancel second-mortgage liens for troubled homeowners.
Second mortgages, home-equity lines of credit and other subordinate liens must be extinguished in order for borrowers to refinance through the federal HOPE for Homeowners, or H4H, program.
The program, a prong of the Obama administration's foreclosure-prevention effort, aims to help underwater borrowers regain lost equity in their homes. However, it has failed to gain much traction, partly due to the obstacle of the second liens.
In a letter Friday, House Financial Services Committee Chairman Barney Frank, D-Mass., and Senate Banking Committee Chairman Christopher Dodd, D-Conn., asked the federal bank regulators to look into whether mortgage servicers are setting aside enough reserves against the second liens they are carrying on their books.
They argued that the current reserve levels do not reflect the diminished economic value of the liens. As borrowers fall behind on their first-mortgage payments or see their home values plunge, second-mortgage or home-equity loans are at greater risk of default.
"Carrying these loans at potentially inflated values may contribute to resistance on the part of servicers to negotiate the disposition of these liens, and thus may stand in the way of increasing participation in the H4H program," Frank and Dodd wrote in the letter.
The Obama administration in April unveiled generous incentives for mortgage servicers that modify second liens and even larger payments for servicers that extinguish those liens.