Home Equity Loans Complicate Mortgage Assistance Most people facing foreclosure hold a mortgage owned by investors and a home equity loan owned by a bank. But with foreclosures at record levels, some investors worry that the banks have some conflicts of interest getting in the way of helping homeowners avoid foreclosure.
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Home Equity Loans Complicate Mortgage Assistance

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Home Equity Loans Complicate Mortgage Assistance

Home Equity Loans Complicate Mortgage Assistance

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Yesterday on the program, we heard about troubles with the government program to stem foreclosures. Today, we hear about worries that banks are making it hard to fix the housing crisis. While mortgage investors are willing to let borrowers refinance loans to help avoid foreclosure, bankers are balking.

NPR's Chris Arnold explains.

CHRIS ARNOLD: These days, most mortgages in the U.S. are owned by various investors, teachers' pension funds, hedge funds. Back before the housing crisis, all kinds of investors bought big bundles of mortgages so that they could collect the interest payments from homeowners. But home equity loans are a different story. These are loans that you might use to borrow $25,000 to, say, fix up your kitchen. They're also called home equity lines of credit, or second loans. And the major banks hung on to those loans and kept the income stream for themselves.

BLOCK: the main mortgages owned by the investors, and the home equity loans that are owned by the big banks - and most people facing foreclosure have both.

BLOCK: The problem becomes that the bank has much more interest in their $25,000 line of credit than helping the homeowner or the investor in this case.

ARNOLD: To understand what's going on here, we called up Scott Simon. He's the managing director at PIMCO. That's an investment firm that holds more than half a trillion dollars worth of home mortgages. Simon manages all of that on behalf of those pension funds and other investors, and as a businessman, Simon really doesn't like all these foreclosures.

BLOCK: Obviously they're bad for the homeowner who gets kicked out on the street, but they're also bad for anybody who invests in the debt. It's very inefficient. You have to pay all sorts of fees and you have to carry the house and it gets...

ARNOLD: Everybody loses. So, as Simon says, actually, many investors like him are willing to take some losses to avoid foreclosures. They want to cut deals with homeowners to lower their payments. He thinks that those loan modifications should be happening a lot more. But he thinks these home equity loans are part of what's getting in the way. He says that just look at the so-called Hope for Homeowners program. It was one of the foreclosure prevention initiatives that the government enacted last year.

BLOCK: Well, there are clearly a huge number of these that are being gummed up. The government had hoped that Hope for Homeowners would do 400,000 loans the first year. They did one loan - not 100,000 loans - one loan.

ARNOLD: Now there's all kinds of problems here. The industry has just been overwhelmed by the volume of people that are calling up and asking for help. But, as Simon thinks, a key problem is that the biggest banks each have about $100 billion in these home equity loans on their books. And he thinks that the banks have been dragging their feet when it comes to modifying or taking losses on those loans.

So even when a homeowner manages to get that first main mortgage modified to have lower payments, Simon's worried that the banks are not cutting homeowners similar deals on their second loans. He says that also means that the homeowner still owes more than their house is worth. That's what called being upside down or underwater and it makes a foreclosure more likely.

BLOCK: That person still feels awful because they're upside down and they still have a pretty good interest burden because the second is typically very expensive.

ARNOLD: So, as Simon thinks, this is part of why we're seeing a lot more foreclosures right now than we should be. The banks disagree. Steve Bailey heads up the foreclosure prevention efforts at Bank of America. He acknowledges that the industry is focusing more on modifying those bigger first mortgages, but he says that that's what the industry should be doing.

BLOCK: The focus of modification is to stop whoever would be foreclosing. In almost all of these situations, the person that's foreclosing is the person that has the first mortgage.

ARNOLD: The Obama administration has recently put in place incentives to get banks to modify more of those second loans, or home equity loans. Bailey says that Bank of America is participating in that program and has therefore agreed to modify a lot more second loans. Still, some economists and people inside the industry are skeptical. They worry that second loans will continue to gum up the works.

Chris Arnold, NPR News.

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