Second Mortgages Jeopardize U.S. Housing Market, Amherst's Goodman Says

The U.S. government and the nation’s largest banks are still allowing second mortgages to jeopardize the housing market, according to Laurie Goodman, an analyst at Amherst Securities Group LP.

While the Treasury Department created an initiative requiring holders of home-equity debt to adjust terms when first mortgages are changed -- a program in which the biggest banks have agreed to participate -- the plan falls short of what’s needed, Goodman said today in a Bloomberg Television interview.

“It seems like there’s a lot of things in that program that won’t be in the borrowers’ best interest or in the interest of the first-lien holders,” Goodman, a mortgage-bond analyst, said, referring to complaints by investors, including BlackRock Inc., that their interests are undercut by those of banks.

The Treasury’s Second Lien Modification Program allows for “long delays” between when first-lien mortgages get changed and when homeowners may get lower payments on their home-equity debt, Goodman said. The four biggest banks, which own more than 40 percent of about $1 trillion in U.S. second mortgages, began signing up in January. The program was announced April 2009.

“As implementation of the Second Lien Modification Program gets under way, the number of second liens that are modified is expected to grow,” Meg Reilly, a Treasury spokeswoman, said in an e-mail.

Also under planned changes announced in March to the federal “Home Affordable” modification program designed to encourage reductions to the principal owed by delinquent borrowers whose loans exceed the value of their homes, it appears that second-mortgage holders won’t be forced to forgive debt, Goodman said in a later interview.

‘Unsustainable’ Obligations

Without easier second-loan terms, consumers are often left with an “unsustainable level” of debt payments, Goodman said. Additionally, “when you’re deciding whether or not to continue paying,” homeowners will consider the total housing debt balance relative to their property’s value, she said.

A fifth of U.S. homes carrying mortgages were worth less than their loans in the fourth quarter, according to Seattle- based Zillow.com. Home prices in 20 metropolitan areas tumbled 33 percent from July 2006 through April 2009, then rose for five months before falling for the next five, leaving them up 2.8 percent from lows, according to an S&P/Case-Shiller index.

Goodman, who’s based in New York, is the former head of fixed-income research at UBS AG who was inducted into the Fixed Income Analysts Society Inc.’s Hall of Fame last year.

To contact the reporters on this story: Jody Shenn in New York at jshenn@bloomberg.net; Margaret Brennan in New York at mbrennan25@bloomberg.net

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