Housing Policy

First Smart Move In a Long Time: Government Surrenders on Second Mortgages

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Second mortgages are not worth bailing out.

One of many ill-advised pieces of the Home Affordable Modification Program may be getting a quiet retirement. The Second Lien Modification Program, which was announced back in April, seems to be on the skids. Calculated Risk puts the story together:

Housing economist Tom Lawler emailed the HAMP administrative website to obtain a list of servicers who had signed up for the Second Lien Modification Program. Here is the response he received:

"That program is currently on hold and there is no list of servicers that registered before it was placed on hold."

This is not an official announcement, and the Treasury office I'm trying to confirm with has been known to take three weeks to answer a pretty simple question. But assuming the program really is suspended, that could be reflective of several things. It may be impossible to get second lienholders to go along with the program (which would explain why "there is no list"). It's possible that so many second-mortgage situations are beyond hopeless that there's no point in starting the effort. It is also possible the $75 billion HAMP program is running short on cash, though given the total value of claimed modifications so far, that seems unlikely.

We all must bend over and accept our circumstances.

In a reaction at the OC Register's real estate blog, Matthew Padilla says the suspension notice is "not a good sign." But in fact, it's an excellent sign. Bailing out bad borrowers is bad policy to begin with, but bailing out second mortgages shocks the conscience. It may not be quite axiomatic that if you are carrrying a second mortgage and you are in default you are by definition not a responsible borrower. But it's as close as anything could be to axiomatic.

Yet the HAMP website predicted the second-lien program would "reach approximately 1—1.5 million responsible homeowners who are struggling to afford their mortgage payments." And Congressional Oversight Panel Chairwoman Elizabeth Warren keeps saying bailing out second liens is the solution to the real estate crisis.

These arguments are getting less traction as time goes by. The destination media have lately begun taking an interest in HAMP's counterproductive results. The HAMP's underwhelming numbers, ineffectiveness, and costly efforts to limit redefaults (which have met with limited success) have been well documented. And the public, which never even wanted to bail out responsible homeowners, can't get excited about saving somebody's cigarette-boat-financing HELOC. If the Treasury Department is looking at that grim battlefield and putting up a white flag, that's the better part of valor.

NEXT: Overspent and Overextended

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  1. I prefer to call it HAMPr.

    1. Do HAMPsters live in the HAMPr?

    2. or perhaps it is the “Home Unaffordable Modification Program” – HUMP

      1. So this post is about Getting Over the HUMP.

        1. Nah, it’s about how we’re all HUMPed thanks to all the bailouts.

  2. Where’s the bailout for us fifth mortage holders?

    1. I can understand second mortgages. I think they are stupid, but I understand them. But for the life of my I can’t understand why any bank would agree to a third or fourth. Which explains in large part why I am not a banker.

  3. The destination media have lately begun taking an interest in HAMP’s counterproductive results.

    What is that, the Travel Channel?

    1. Anthony Bourdain and the Cake Boss both agree that bailing out borrowers on their second mortgages is poor fiscal policy.

    2. I took it to refer to media outlets who have the end narrative of a story already decided, and choose what to include in order to reach that destination.

      What we’re seeing now is the trip being disrupted by the media trying to drive to the destination while being broadsided by hurricane-force winds.

  4. Tim- seen this one?

    There are two reasons why so-called strategic defaults have been considered antisocial and perhaps amoral. One is that foreclosures depress the neighborhood and drive down prices. But in a market society, since when are people responsible for the economic effects of their actions? Every oil speculator helps to drive up gasoline prices. Every hedge fund that speculated against a bank by purchasing credit-default swaps on its bonds signaled skepticism about the bank’s creditworthiness and helped to make it more costly for the bank to borrow, and thus to issue loans. We are all economic pinballs, insensibly colliding for better or worse.

    There are rational, reasonable arguments to made made for walking away from a mortgage which is under water, but I don’t think Roger Lowenstein knows any.

    I can’t help thinking this guy is a fucking cretin.

    1. We are all economic pinballs, insensibly colliding for better or worse.

      That’s just what Mama told me.

    2. Every oil speculator helps to drive up gasoline prices.

      What an economic nitwit. People speculate the long and the short side of oil and every other commodity, so you might as well say oil speculators help to drive gas prices up and down.

    3. Does this guy make any claim to being an actual moral agent, or simply an infantile being awaiting satisfaction?

  5. Bailing out seconds makes beyond no sense.

    If you took out a second and are now underwater and stop paying, it’s a win-win for you. You got the bank to give you spending money and now they get squat. If the property goes into foreclosure, the first lien holder will get paid and the second lien holder will get squat in almost every case. The second lien holder knows this and probably won’t even initiate proceedings. Why even bother to obtain a bailout on an underwater 2nd, if you’re a consumer? So you can pay it off? Give the bank a big zero and laugh.

    1. Of course, if its a recourse loan, the 2nd could come after you for the balance, but they dont.

    2. Bailing out seconds makes beyond no sense

      See that’s exactly the phrase I was looking for. This post would have been 1/2 as long if I’d found it.

  6. The destination media have lately begun taking an interest in HAMP’s counterproductive results.

    Bogus! HAMP is extremely productive, if allowed to work as it should. It can be used to make cheap rope, clothing and paper. Poor Woody Harrelson must be rolling one in his grave right now.

    1. Huh?

    2. It is also a potential source of biofuel.

    3. Naw, what you are referring to is HEMP, a banned, economically useful, multipurpose, plant.

  7. Nice to know that these second liens are the backing for a lot of the retail deposits held in the big 6 mega banks. Better hope the FDIC makes good on their promise to print off fresh notes to cover any shortfalls.

  8. How is a guy who cashed out the equity in his house for walking-around money during the boom, and now can’t (or won’t) make the payments a “victim”?

    And, for that matter, how is a banker who made loans based on overly optimistic bogus appraisals a “victim” of anything but his own stupidity?

  9. The predestination media had the story first.

  10. The Second Lien Modification Program, which was announced back in April, seems to be on the skids.

    No! Obama promised we would keep opur homes! Just like he promised to air all debates in C-SPAN! He wouldn’t lie, would he?

  11. i am pleasantly surprised to not see any “stop blaming poor people” comments. not that the comment would really make sense, but those types of comments do tend to show up when you talk about delinquent mortgages.

    1. I’m pretty sure all the government incentives to help us poor folk get houses in spite of bad credit and no down payment didn’t cover second mortgages.

  12. Unlike first mortgage lenders, whom Congress has protected by giving them a cramdown exception in bankruptcy law, second mortgagors have no such protection from the vagaries of the free market. If you file bankruptcy, and the home is worth less than what you owe on the first, the second is properly treated as unsecured, and you can completely discharge the second in Chapter 13. It’s no wonder that a government program to bail out second liens isn’t going to fly; no distressed homeowner is going to be stupid enough to enter such a program when they can dump the bad loan, and keep the house, through bankruptcy.

  13. The real estate bailout has better acronyms.

  14. Stop blaming us poor people!

    Good thing the lake’s iced over, cuz I got no money to put gas in the bass boat. Hope they get this thing straightened out before the pro tour starts this spring.

  15. Hm. Banks don’t want to loan money to people who cannot pay it back. In other news, water continues to flow downhill, fire is hot, and Washington politicians are using our money to promote themselves. Film at 11.

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