Major Lenders Push for Options to Second-Lien Cuts

WASHINGTON — Despite pressure from lawmakers to reduce principal on second liens, top executives from major institutions argued at a hearing Tuesday that this should not be their only option, and warned that making it so could harm other borrowers who are current on their mortgages.

Executives from Bank of America Corp., JPMorgan Chase & Co., Citigroup Inc. and Wells Fargo & Co. said they were taking steps — in many cases outside the Treasury Department's Home Affordable Modification Program — to reduce the amount troubled borrowers owe on their homes. But they said principal reductions alone would be insufficient.

"We do not believe there is a 'one size fits all' approach to affordability," Sanjiv Das, the president and chief executive of Citi's mortgage unit, said during a hearing of the House Financial Services Committee. "We believe principal reduction is not the only solution for those who are experiencing financial hardship."

David Lowman, the CEO of JPMorgan Chase's global mortgage business, cautioned that forcing lenders and investors to take losses on second liens could harm consumers by spooking the markets.

Borrowers, he said, would likely be required to increase down payments, while credit criteria could be further tightened and risk premiums for mortgage credit would increase and get passed on to consumers. "Less-affluent borrowers would likely be harmed disproportionately," Lowman said.

JPMorgan Chase estimates it would cost up to $900 billion to reduce underwater borrowers' home loan balances. "The cost is great," Lowman said. "It certainly would be a hazard and risk we would have to bear in the future."

Rep. Barney Frank, D-Mass., the chairman of the House Financial Services Committee, has urged the four big banks to write down these second mortgages. The four institutions hold a combined $423 billion of home equity loans, including $151 billion of loans to borrowers who are either underwater or close to it.

Policymakers have pushed for second-lien modifications in part because many investors are reluctant to take a hit on first liens without the holder of the second sharing the pain. Also, modifying the first lien while leaving the second untouched may not make much of a dent in the borrower's total debt burden.

But some of the bankers argued that modifying both loans was not necessary.

"Our data shows that second-lien modifications are not an impediment to first-lien modifications," Lowman said. "It's also unclear how much principal reduction would be required to reduce delinquencies among underwater borrowers — making it extremely difficult to measure the economic losses for investors."

Rep. Paul Kanjorski, the panel's No. 2 Democrat, said he believed second liens were an impediment to modifications on first liens.

But Barbara Desoer, the president of Bank of America's home loan unit, said the presence of a second lien has not prevented her company from modifying its first liens, even when the second lien is owned by a third party and hasn't been modified.

Of the 10.4 million first liens Bank of America services with a second lien, 16% have a second lien with another lender, she said.

In January, Bank of America became the first major loan servicer to sign on to a Treasury program designed to facilitate modifications of second liens. Desoer said the company "acted with a sense of urgency" and has already begun mailing trial mod offers to home equity customers facing financial difficulty.

Desoer said second liens need to be part of the modification process, but cautioned that broad-scale extinguishment is not the solution because the majority of second liens do hold value. Banks contend that they should not have to write down loans that are performing. Out of the 2.2 million second loans in Bank of America's portfolio, only 91,000 are delinquent, Desoer said.

Still, she acknowledged that more needs to be done on second liens, especially in cases where the first lien is held by a different investor. Bank of America, she said, would advocate an industrywide process that would require a second-lien holder to take a principal balance reduction similar to that suffered by the first-lien holder.