The heads of Congress' banking panels urged regulators Friday to crack down on second mortgage holders inflating their asset values.

House Financial Services Committee Chairman Barney Frank and Sen. Chris Dodd, who chairs the Senate Banking Committee, told agency leaders that an unwillingness of second-lien holders to give up on their loans was hurting workout efforts.

"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," they said in a letter to the federal regulatory agencies.

Under the government's HOPE for Homeowners program, servicers can negotiate compensation to second mortgage holders in a bid to release the subordinate lien and process the first mortgage through a federally-subsidized workout.

But Frank, D-Mass., and Dodd, D-Conn., said subordinate holders are not cooperating, not "even in return for offers of reasonable compensation."

The lawmakers expressed concern that loss reserves carried by lenders for second liens "may be insufficient to realistically and accurately reflect their value."

Lenders are refusing to let go of second mortgages "despite the fact that these subordinate liens may have minimal economic value," Frank and Dodd said.

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