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!"

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Jill Schlesinger is the Editor-at-Large for CBS MoneyWatch.com. Prior to the launch of MoneyWatch, she 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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    Jill Schlesinger, CFP®, is the Emmy-nominated, Business Analyst for CBS News. She covers the economy, markets, investing and anything else with a dollar sign on TV, radio (including her nationally syndicated radio show), the web and her blog, "Jill on Money." Prior to her second career at CBS, Jill spent 14 years as the co-owner and Chief Investment Officer for an independent investment advisory firm. She began her career as a self-employed options trader on the Commodities Exchange of New York, following her graduation from Brown University.