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Vicki Been, Howell Jackson & Mark Willis, Essay: Sticky Seconds—The Problems Second Liens Pose to the Resolution of Distressed Mortgages, 9 N.Y.U. J.L. & Bus. 71 (2012).

Abstract: Almost five years into the foreclosure crisis, policymakers, the mortgage industry, consumers and taxpayers all express disappointment over the slow pace of modifications, refinancings, and other resolutions of borrowers’ distress short of foreclosure auctions. Many analysts point to the prevalence of second liens on the properties as a significant impediment to efficient resolutions of borrowers’ distress and therefore to the stabilization of the housing market. In addition, many observers argue that a significant number of second liens are at serious risk of default, and therefore may imperil the financial solvency of the financial institutions holding the liens. To better understand whether and how second liens might prevent efficient resolutions of borrower distress and to assess how second lien holders could be encouraged to cooperate with efficient resolutions without undermining the financial interests of the banks, we reviewed existing data and research, as well as debates among both academics and industry experts about the role second liens might be playing in slowing the recovery of the housing market. We then convened a small group of experts from across the country on April 10th, 2012, gathering around one table servicers, investors, title insurers, consultants, bank regulators, government officials, mortgage counselors, economists, lawyers, accountants and academics to explore the full range of issues that second liens pose to efforts to stabilize the housing market. This article reports the results of our research and the roundtable discussion. It first explores what we know about the prevalence and delinquency rates of different types of second liens, the extent to which banks are exposed to losses on the liens, and the extent to which the banks already have accounted for those expected losses. It then reviews the various reasons that second liens have interfered with the efficient resolution of distressed mortgages, and documents advances that recently have been made in addressing those problems. Finally, the article examines the most promising proposals for reducing the transaction costs and frictions that are behind many of the current problems second liens are posing, as well as proposals to prevent similar problems from arising in the future. We focus our analysis of solutions on programs to remove barriers to greater coordination between first and second lien holders, rather than on the incentive approaches that have already been attempted.