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Here's Why Loan Modification Is Stuck
This post by Jill Schlesinger originally appeared on CBS' MoneyWatch.com.
The news from the housing market is mixed. According to MoneyWatch blogger Ilyce Glink,
while it's probably a good time to buy a house (assuming you can afford
it and can qualify for financing), many existing homeowners are
struggling. Mortgage delinquencies continue to rise, as the government programs seem incapable of stemming the tide of foreclosures.
Why aren't more loans being successfully modified? Many believe that the problem lies in the second loan market. Banks' balance sheets are filled with these loans and have yet to realize the losses on them. If the banks were to own up to the true value of the loans at this point, it would result not only in losses, but in a potential increase in regulatory capital. In other words, if everyone trued up their holdings, the Federal Reserve would like demand that the banks keep more money in reserves, which would reduce their ability to lend and to make money.
Check out this chart from Reuters to see just how much money is tied up in second mortgages at the big banks. As one insider told me: "the numbers are interesting, albeit scary!"
More on MoneyWatch:
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Jill Schlesinger Jill Schlesinger, CFP®, is the Editor-at-Large for CBS MoneyWatch. She covers the economy, markets, investing or anything else with a dollar sign. Prior to the launch of MoneyWatch in 2009, Jill was the chief investment officer for an independent investment advisory firm. In her infancy, she was an options trader on the Commodities Exchange of New York.
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