The Obama administration’s $75 billion effort to help troubled homeowners avoid foreclosure has hit a stumbling block: a fight over how to aid borrowers who have more than one home loan.
The Treasury Department, scrambling to address the problem, is trying to persuade lenders to forgive or greatly reduce so-called second liens. But that effort has sparked a fight between investors who own securities backed by first mortgages and banks that hold second mortgages over how losses should be shared.
A failure to resolve the impasse could blunt the impact of President Barack Obama’s housing plan, which is designed to tackle one source of the financial crisis — the spiral of foreclosures and falling home prices. About half of seriously delinquent borrowers have a second mortgage debt, according to Credit Suisse.
Administration officials had hoped to announce a plan this week with the support of bankers, homeowner advocates and investors, who include pension funds, insurance companies and hedge funds. Instead, they find themselves shuttling proposals between warring parties.
“If everybody wants to play chicken and hold out, it’s not going to serve anybody,” said Janneke Ratcliffe, a housing expert at the University of North Carolina at Chapel Hill.
Just as a chain is as strong as it’s weakest link, the short sale is as weak as its least competent bank. While the first Aurora Bank was very timely, the second CITI which has no real equity can’t or won’t approve a mash down from the first. If this were to foreclose CITI will lose everything, but won’t approve a $3000-$ 5000 settlement in a timely manner.