Barney Frank Wants Banks to Take the Hit On Second-Lien Mortgages (JPM, C, WFC, BAC)

In an attempt to avoid a deepening crisis in the U.S. housing market, House Financial Services Committee Chairman Barney Frank has informed the four largest mortgage lenders in the U.S. to write down second mortgages.

A letter was sent by Frank, a Democratic Representative from Massachusetts, to the CEOs of JPMorgan Chase & Co. (NYSE: JPM), Citigroup Inc. (NYSE: C), Wells Fargo & Company (NYSE: WFC) and Bank of America Corporation (NYSE: BAC), which was dated March 4, that said that losses on second mortgages are going to be necessary to allow first mortgages to be modified.

Frank told the banks that this was critical to ensure future stability in the U.S. housing market and to stop the widespread foreclosures.

"To save homes on a large scale, we must move past temporary modification in interest rates or terms and focus on permanent principal reductions that result in truly sustainable mortgages," said the letter from Frank. "I urge you in the strongest possible terms to take immediate steps to write down these second mortgages and allow principle modifications of the underlying first liens to take place."

The mortgages that are at issue are second lien mortgage, which in the case of homeowner owing more than the home is valued from the first loan, are worthless. The banks that own and modify the first mortgages also hold a substantial portion of the second mortgages, which has created a possible conflict of interest.

"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,” wrote Frank.

Meanwhile, the government has been talking with mortgage lenders to get them on board with a second-lien component of the Home Affordable Modification Program. Bank of America has already signed on to be a part of the program.

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