[quote]One of the barriers to liquidation is the write downs required by “solvent” banks (we all know most of them are not solvent). A huge problem within the GSE portfolios is that the servicers of delinquent loans are intentionally delaying foreclosure when the parent bank holds the second mortgage.
For example, let’s say that Bank of America is the servicer on a delinquent first mortgage. Their servicer agreement with the GSEs lays out a procedure to mitigate losses for the GSE portfolio. If there is no second mortgage, servicers will generally follow these procedures to the letter, and in the end, most properties end up in foreclosure. However, if Bank of America is the servicer, and they also hold the second mortgage, they do not follow standard procedure because the resulting foreclosure will cause them to lose most or all of the value in the second mortgage.[/quote]
