Housing finance experts have expressed concern that principal reduction would unfairly benefit the banks that own many of those second liens, with some calling for second liens to be wiped out if the first lien gets cut.
Naturally, lenders prefer to be in the first lien position.
When it is the first lien holder, it will offer the same to holders of the second lien.
The first lien holder has the first right to any money recovered, and the second lien holder has to wait its turn.
Mr. DeMarco also raised the thorny issue of second liens on homes where the first lien — the mortgage — has been reduced.
He analyzed mortgage securities made up of loans by Countrywide Financial, which is now owned by Bank of America, looking for instances when the second lien was still extant, even though the first lien attached to the same property had been modified.
Holders of $525 million of junior bonds would not receive any of the first lien five-year notes but would receive $30 million of the second-lien five-year issue and the common stock.
As the first lien holder on the property title, however, the lender must be repaid when the property changes hands.
He added that because Mr. Hayes has several liens on the house, the first lien is probably the only one that will be repaid in full.
