...holders of second-lien mortgages are now a principal obstacle to many [loan] modifications. The problem of second-lien mortgages standing in the way of successful principal reduction modifications has reached a critical stage and requires immediate attention from your institutions.
Large numbers of these second liens have no real economic value - the first liens are well underwater, and the prospect for any real return on the seconds is negligible. Yet because accounting rules allow holders of these seconds to carry the loans at artificially high values, many refuse to acknowledge the losses and write down the loans, which would allow willing first lien holders to reduce principal and keep borrowers in their homes.
From a proposal from the Mortgage Investors Coalition (never hear of 'em) to Congress:
A systemic program to modify second lien mortgages called 2MP does exist but Treasury has stalled on implementation because the banks that hold them can’t afford it, six buyside investors said. The sources all said implementation of the program, called 2MP, would result in “catastrophic” losses for the nation’s four largest banks
[earlier in the letter...] The four banks in question collectively own more than USD 400bn of the USD 1trn in second lien mortgages outstanding. BofA holds USD 149bn, Citi holds USD 54bn, JP Morgan holds USD 101bn and Wells Fargo holds USD 115bn, according to fourth quarter 2009 10Q filings with the Securities & Exchange Commission.
Voltron says: Wells Fargo's entire market cap is only 153bn and it's book value is about 104bn, so if the 115bn in second liens has "no real economic value", they are pretty much broke.
The current Treasury Dept HAFA program is offering second lien holders only 3% not to exceed $3,000 with 2/3 of that to be paid by the first lien holder and 1/3 paid by the taxpayer. That's peanuts.