Any refinancing program for homeowners who are current on their payments but underwater on their mortgages will have to deal, one way or another, with the tricky issue of second mortgages and home equity lines of credit (HELOCs).
How much equity behind those home equity loans?
Banks carry billions worth of home equity loans on their books, but analysts skeptical of their worth.
Most lenders don't keep first mortgages on their books. Instead, those loans are packaged and sold (securitized) to investors. So, losses on first mortgage writedowns or refinancing don't have much impact on a bank's balance sheet.
But the situation is much more different for HELOCs. Bank of America has about $134 billion worth of HELOCs on its balance sheet. Wells Fargo has about $111 billion. U.S. Bank has about $19 billion.
Lenders are taking a hit on their HELOC portfolio. About 3 percent of Wells Fargo's portfolio is two payments or more past due, and the annualized loss rate is about 3 percent. But some analysts say banks would rather "extend and pretend" than acknowledge that many of these loans back equity that no longer exists - and may never return.
Any refinancing program will have to figure out a way to effectively deal with HELOCs and/or second mortgages. Can they all be rolled into one new, lower-rate mortgage? Should the principal on the HELOC be written down to reflect the market reality? If so, should HELOC lenders be able to share in any future equity gains from the sale or refinancing of that house?
The Congressional Budget Office has estimated that a government refinancing initiative that involved 2.9 million mortgages would save homeowners an estimated $7.4 billion in one year. It would prevent 111,000 defaults, and save the federal housing agencies an estimated $3.9 billion.
The cost would be borne mostly by private investors in mortgage bonds, who would see their inccome fall as loans are paid off earlier. The U.S. Treasury would also see an estimated $600 million less in tax revenue.