The Difficulty of Modifying Second Mortgages

One of the many obstacles to resolving the housing mess is that so many people during the boom used their houses as piggybanks, taking out second mortgages and helocs that were often originated by different banks from the originator of the first lien mortgage.  In order to do a short sale--or much of anything short of foreclosure--you need to get the second lien holder on board.  This is even harder than getting your first mortgage holder to help you, since there's usually nothing in it for the second guy in line except a sure and certain loss.  The Obama administration has made some efforts to pull the second lien servicers into the process, but the results have been even more pitiful than the single-loan modification process.

This was a problem in the Great Depression, too, though the conflict was less between banks than between individuals who often issued or bought individual mortgages as investments.  No good way to resolve the problem was found, and thus it is still with us.  I'm toying with the notion that we should ban second mortgages by any except the first mortgage holder, but this would turn the first mortgagee into an effective monopolist, and also effectively kill securitization.  Plus I don't know what you do with an insolvent bank if all the first and second loans have to be sold as packages.

Still, it would be nice if we could figure out something to do.  We need to figure out how to resolve the housing mess sometime before the turn of the next century.

Presented by

Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

The Blacksmith: A Short Film About Art Forged From Metal

"I'm exploiting the maximum of what you can ask a piece of metal to do."

Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register.

blog comments powered by Disqus

Video

Riding Unicycles in a Cave

"If you fall down and break your leg, there's no way out."

Video

Carrot: A Pitch-Perfect Satire of Tech

"It's not just a vegetable. It's what a vegetable should be."

Video

An Ingenious 360-Degree Time-Lapse

Watch the world become a cartoonishly small playground

Video

The Benefits of Living Alone on a Mountain

"You really have to love solitary time by yourself."

Video

The Rise of the Cat Tattoo

How a Brooklyn tattoo artist popularized the "cattoo"

More in Business

Just In