How Banks Can Win From Being Second

Wall Street Journal  
February 4, 2010
Eavis, Peter
P. C10

First mortgages take priority over junior mortgages, which theoretically should shoulder a loss first in any workout aimed at saving a borrower from foreclosure. Yet federal programs meant to make first mortgages less burdensome have left second-lien loans mostly unmodified, essentially giving the junior lender a free pass in some cases. This is a dilemma for the White House, as the performance of its Making Home Affordable program could improve if second mortgages took more of a hit. The median debt-payments-to-income ration of program participants winning a permanent modification is 55.1 percent -- which is still high and could result in a high redefault rate -- but slashing the junior debt could significantly lower that ratio.

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