Association of Mortgage Investors: Profitable Banks are Transferring Mortgage Losses to Private Investors

NEW YORK, April 21 /PRNewswire/ -- The Association of Mortgage Investors today released the following statement in response to Q1 earnings reports by Bank of America, Citigroup, JP Morgan Chase and Wells Fargo:

"Each of the big four banks earned multiple billions in net profits this quarter. Their substantial profits are a positive sign for the economy, but foreclosure numbers and consumer debt levels indicate the recession is not over on Main Street.

The current approach to solving the foreclosure crisis – namely, the Home Affordable Modification Program – is falling well short of expectations, and the market needs permanent solutions for non-performing mortgages. Recent conceptual changes to HAMP and FHA refinance programs are positive, but these solutions will not succeed unless the banks stop shifting their mortgage losses to investors in first lien mortgages, and confront their conflicts of interest.

The banks remain conflicted by their massive investments in portfolios of home equity loans and lines of credit and servicing fees. While they have aggressively modified first mortgage debt, they have done little to nothing on second mortgage debt, which they own. This has resulted in homeowners remaining deeply in debt with second mortgages that continue to exceed the current value of their home. AMI would like banks to provide a full and transparent accounting of their second lien modifications where they own first and second liens on the same property, and we ask policymakers to question whether banks should get any taxpayer-funded incentive payments if they're avoiding transparency.

The four banks that service approximately 40 percent of mortgages held roughly $419 billion of second liens on their balance sheets as of December 31, 2009. Under temporary loan modification programs such as Making Home Affordable, banks are able to defer the recognition of losses on the second lien portfolios. In fact, the current HAMP program actually improves the cash flow available to the second mortgage at the expense of the first mortgage and defers the immediate loss that would be recognized in a foreclosure, short sale or short refinance. Although the largest institutions have now signed up for the 2MP second lien modification program under HAMP, that one-year old program has yet to be implemented.

In addition to encouraging the banks to write down principal on second liens to allow for borrowers to be refinanced into appropriately sized mortgages, the Association of Mortgage Investors proposes:

• Appointing special servicers in situations where the bank owned servicer has a conflict.
• Revising safe harbor to only work when debt reductions are shared by all creditors.
• Allowing investor-appointed third parties to review loan files for violations of representations and warranties.
• Creating an all-encompassing homeowner restructuring framework.

The Association of Mortgage Investors supports the framework of FHA's recent announcement to reduce principal through a refinancing program for homeowners who are 'underwater' on their mortgage. However, the details of the program are vague, and it is not clear whether servicers will implement the program or holders of second lien positions will participate in the program. 

In their quarterly report to Congress, released today, The Special Inspector General for TARP noted that, 'Making principal reduction discretionary may limit HAMP's effectiveness.' The Association of Mortgage Investors stands ready to work with Treasury and servicers to develop details for the latest programs. It is imperative that banks' conflicts are dealt with in order for any program to succeed. Now is the time for second lien holders to support programs that will lead to permanent solutions for homeowners, including meaningful reduction in principal and a short refinancing program."

SOURCE Association of Mortgage Investors