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The Second Mortgage

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March 11, 2010 – Comments (6)

Here's an interesting piece on how second mortgages are essentially worthless, but they are in the way of loan modifications.  If second mortgages were written down to the their true value banks would have to raise hundreds of billions of dollars in capital, and they are a key reason that the stress tests on the banks were a complete joke.

So, it looks like two potentially large hits for the banks in the next year or two, the commercial real estate loans, which because they are businesses I suspect will correct fairly fast compared to the housing market, and the continuing mortgage problem.

6 Comments – Post Your Own

#1) On March 11, 2010 at 10:57 AM, chk999 (99.98) wrote:

The 2nds are only worthless if the holders stop paying on them. Since housing is one of the things people give up on last, the fact that the mortgage is underwater isn't as relevant.

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#2) On March 11, 2010 at 10:58 AM, Melaschasm (65.29) wrote:

While he makes good points, it is possible that the government will inflate its way out of the worst of the real estate problems, resulting in something closer to a 20% loss of value on second mortgages, in nominal terms.

In many ways we seem to be following Japan's model of dragging out the bank losses over many years, so that we do not suffer as much short term shock.  If this ends up being the case, we may be looking at years of stagflation.

 

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#3) On March 11, 2010 at 5:02 PM, imobillc (< 20) wrote:

stagflation?

you make me laugh... HA>>HA>>HA

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#4) On March 11, 2010 at 5:03 PM, imobillc (< 20) wrote:

stagflation?

you make me laugh... HA>>HA>>HA

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#5) On March 11, 2010 at 5:11 PM, imobillc (< 20) wrote:

chk999

I agree with you, trey are a failure!

I believe that second mortgages should be written down and got rid off all together for a chance of market (RE) stabilization to start. Report this comment
#6) On March 11, 2010 at 10:24 PM, rd80 (98.66) wrote:

In many states, a first mortgage is non-recourse, meaning the bank can only go after the house in the event of default.  However, second mortgages are typically full recourse. 

With a full recourse loan, the lender can go after income or other assets the borrower may have.  Therefore, a second mortgage may have value in a default/foreclosure situation even if the first mortgage is underwater.  That's why banks are hesitant to write off second mortgages; their value is based on a combination of the value of the property and the borrower's ability to pay.

Two situations where a second would have value even with an underwater first:

1.  A reset pushes the 1st payment to an unaffordable level for the borrower, but he/she still has a job and could afford to make payments on the second while renting a place to live.

2. Jingle mail for convenience.

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