STOCK MARKET WATCH -- Wednesday, 4 April 2012

[Demeter]

4. Treasury’s Ridiculous Defense of their Second Lien Policies

http://news.firedoglake.com/2012/04/02/treasurys-ridiculous-defense-of-their-second-lien-policies/

Gretchen Morgenson’s story, confirmed as an issue by FHFA Acting Director Ed DeMarco, about banks being enriched by Fannie and Freddie principal reductions if their second liens aren’t wiped out is simply an expression of reality. If the seconds are allowed to stand, the banks make money on the increased ability to pay on the seconds as a result of reducing principal on the firsts. That’s just basic logic. The rebuttal was that nobody seriously thinks that the seconds shouldn’t be wiped out if the firsts get written down. That’s not true, as Felix Salmon had to grudgingly admit.

Now we get confirmation that it is, in fact, government policy to maintain seconds while writing down firsts, from no less than the US Treasury Department. Treasury official Michael Stegman wrote a blog post that depressingly refers to “various sources” rather than citing Gretchen Morgenson herself (I guess I should be comforted that I’m not the only person to whom this happens). Anyway, Stegman then goes through the motions of defending Treasury’s policies on second liens.

In fact, the principal reduction program that we have asked the FHFA to allow the GSEs to participate in, the principal reduction alternative of the Home Affordable Modification Program (HAMP), is designed to protect against exactly this result.

Of course, not all under water GSE loans have second liens. But if they do, under HAMP, where a first lien mortgage is modified, then the holder of an eligible second lien must modify that lien proportionately if they are a participant in the Second Lien Modification Program (2MP). Most major servicers are participants in 2MP, so most will be obligated. Thus, any HAMP modification that includes principal reduction would trigger an obligation on the part of a participating second lien holder to write an eligible second down to the same degree. It is also worth noting that Treasury-paid incentives to first lien holders apply to matched second liens, though those incentives are less than the ones for first lien modifications, in light of their subordinated status....

MORE...I AM INVOLVED IN A SIMILAR 2ND LIEN SITUATION THROUGH THE CONDO AND COOP ASSOCIATIONS AS TREASURER...TALK ABOUT DEJA VU!