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.

Why Is Google Making Human Skin?

Hidden away on Google’s campus, doctors at a world-class life sciences lab are trying to change the way people think about their health.

Join the Discussion

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

Please note that The Atlantic's account system is separate from our commenting system. To log in or register with The Atlantic, use the Sign In button at the top of every page.

blog comments powered by Disqus

Videos

Why Is Google Making Human Skin?

Hidden away on Google’s campus, doctors are changing the way people think about health.

Video

How to Build a Tornado

A Canadian inventor believes his tornado machine could solve the world's energy crisis.

Video

A New York City Minute, Frozen in Time

This short film takes you on a whirling tour of the Big Apple

Video

What Happened to the Milky Way?

Light pollution has taken away our ability to see the stars. Can we save the night sky?

Video

The Pentagon's $1.5 Trillion Mistake

The F-35 fighter jet was supposed to do everything. Instead, it can barely do anything.

More in Business

Just In