I am often asked to represent Long Island homeowners with loan modifications and I almost never do.  A while back I even commented about Why I Won’t Negotiate Loan Modifications.  The reason is that it is extremely difficult, results are often impossible to achieve and the vast majority of homeowners are never approved.

 

There are several reasons why mortgage banks are reluctant to modify mortgages, and in those rare cases that they do, the lenders move at a painfully slow pace, often at the same time they are continuing with pending foreclosure actions.
 
Big Banks Have an Incentive to Avoid Mortgage Modifications

 

Yesterday, in the course of testimony before a Senate committee, another reason emerged.  It appears that the big banks have big financial reasons for moving at a snail’s pace to modify mortgages.

 

Senator Tim Johnson (D-S.D.), who is in line to chair the Senate Banking Committee, said that he had “serious concerns” that banks have been unwilling to offer more generous concessions on the first loans of troubled borrowers because they were afraid of taking big losses on their massive portfolios of second mortgages, according to an article in today’s Congress Daily.

 

Law Professor Adam Levitin of Georgetown University Law Center testified before the Committee that our country’s four largest banks had more than $400 billion worth of second mortgage liens – which is roughly equal to their collective market capitalization.

 

The banks carry those second mortgages and home-equity loans on their own books as very significant assets with substantial value.  However, the banks would be forced to take immediate losses if they were modified.  Instead of carrying very large assets on their books, as they are doing now, they would have to immediately adjust their value.

 

Levitan testified that “If they start writing off their second lien mortgages, they would have no capital. They would be insolvent.” He then went on to explain that this “creates a strong incentive not to recognize losses and just try to pretend it is not there.”
 
Why the banks have not already adjusted their books because of a legal obligation to do so, is beyond me, and an issue that should be investigated in and of itself.
 
In any event, homeowners continue to pull their hair out trying to get their lender or mortgage servicer to modify their mortgage.  We now know an additional reason why that is the case.
 
For more posts about mortgage modification, see the post What If My Home Loan Modification Isn’t Approved? written by my associate, Jason S. Leibowitz.
 
Also, I have written numerous posts about the failures of the HAMP program, most recently, Problems with HAMP — Too Many to Count?