loans

The president came out with a program to help save the homes of people in financial trouble but the banks did not promote it. The plan is called Mortgage Modification Program. It was designed to help people whose payments were more than they could afford by modifying the loan to reduce payments.

When you take out a mortgage it is called the first mortgage and these mortgages are often sold to pension companies as investments. When you take out a second mortgage the bank normally retains possession of these. Now if you get in trouble the second mortgage is subservient to the first so if the bank has to forgive part of your loan it will be the second and thus a direct loss to the bank. It is not surprising that the banks were uncomfortable with this program and thus only a small number of home owners were helped. Here is a quote from the Financial Times of London.



The resistance of many banks to modify loans never made any sense to me, since a home sold at aforeclosure auction often sells for much, much less money than it bring through a conventional sale. Also, a significant number of foreclosed homes are damaged once their owners are forced out, which only drags the value down further since it's hard to sell a home that's covered in spray paint with broken windows. Banks should be highly motivated to avoid having to seize and auction properties.

But it turns out banks have another motive. Many of the banks that service home loans also have made second mortgages to these properties, as the FT points out. A second mortgage is subservient to the first mortgage, so the first mortgage is supposed to be paid first.

That means if the terms of the primary loan are changed, the secondary loan could be wiped out. Some secondary mortgage lenders are fighting to share the losses with the primary lender, according to the FT



Just one more example of the unexpected consequences of good intentions. Seems our government never learns.