boaBy Jody Shenn

March 10 (Bloomberg) — Bank of America Corp. and JPMorgan Chase & Co. will be tempted to provide relief to too many homeowners under the Obama administration’s mortgage-modification plan to aid their home-equity loan portfolios, Amherst Securities Group LP analysts said.

Those two banks along with Wells Fargo & Co. and Citigroup Inc., the top four U.S. first-mortgage servicers, will face conflicts because they own $441 billion of second-lien home- equity lines and loans along with overseeing $6.1 trillion of home loans, mostly for other investors or guarantors, Amherst’s Laurie Goodman and Roger Ashworth wrote in a report yesterday.

“It is clear that any restructuring on the first puts the second lien in a stronger position,” the analysts wrote.

The conflict is just one of several for servicers created by the plan intended to stem the U.S. housing slump, according to the New York-based analysts. These conflicts may harm mortgage- bond investors. By locking borrowers into lower payments they’ll be unlikely to give up soon, the companies also can boost the value of some of their servicing contracts sevenfold by extending their expected durations, they said in a report last week.

“Clearly, with housing values continuing to decline in many areas, a performing first lien likely will benefit both the first-lien and second-lien holders” because foreclosures or short sales often occur without modifications and those often wipe out second loans, Rick Simon, a spokesman for Charlotte, North Carolina-based Bank of America, wrote in an e-mail.

Second-Lien Situation

The Obama plan, which offers “fairly clear-cut guidelines” on what should be done with first mortgages, “does nothing to benefit the second lien beyond attempting to provide a framework that allows the first lien to perform and get paid, perhaps allowing the second-lien holder to get paid at some time in the future,” he added.

Christine Holevas, a spokeswoman for New York-based JPMorgan, and Mark Rodgers, a spokesman for New York-based Citigroup, declined to immediately comment. Kevin Waetke, a spokesman for San Francisco-based Wells Fargo, didn’t return a telephone message seeking comment.

The $75 billion mortgage plan, which may help 3 million to 4 million homeowners avoid foreclosures, calls for government payments to servicers, borrowers and lenders including securities investors before and after loans are reworked to lower consumer payments. Lawmakers are also debating giving servicers “safe harbor” from investor lawsuits to boost modifications, which would remove bondholders’ “last line of defense,” the Amherst analysts said.

Non-Backed Bonds Slump

Mortgage bonds without government backing have slumped over the past month amid concern that the modification plan, announced Feb. 18, will hurt holders and as stock and bond markets weakened on signs the global recession may deepen.

So-called super-senior securities backed by Alt-A fixed-rate mortgages fell about 7 cents on the dollar to 43 cents, while similar prime-jumbo securities declined 9 cents to 66 cents, over the month preceding its March 6 report, Barclays Capital said.

Amherst is a securities firm specializing in trading and advising investors on home-loan debt. Goodman is the former head of fixed-income research at UBS Securities LLC. Her team was top ranked for “non-agency” mortgage debt in a 2008 poll of investors by Institutional Investor magazine.

Other Plan Hurdles

Other issues related to home-equity loans, also called second mortgages, may also impair the modification plan. The congressionally appointed panel overseeing the U.S.’s $700 billion financial-company bailout, led by Harvard Law Professor Elizabeth Warren, said in a March 6 report that one of the plan’s flaws was that it didn’t “more fully address the contributory role of second mortgages in the foreclosure process, both as it affects affordability and as it increases the amount of negative equity.”

The Treasury Department says on its Web site that, “while eligible loan modifications will not require any participation by second-lien holders, the program will include additional incentives to extinguish second liens on loans modified under the program, in order to reduce the overall indebtedness of the borrower and improve loan performance.”

Under the plan, servicers “will be eligible to receive compensation when they contact second-lien holders and extinguish valid junior liens (according to a schedule to be specified by the Treasury Department, depending in part on combined loan to value),” according to the Treasury fact sheet.

To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net.

Last Updated: March 10, 2009 16:45 EDT