Almost 70 percent of Massachusetts homeowners who purchased during the housing boom with second liens are now underwater, according to a recent Banker & Tradesman analysis of data provided by our parent company, The Warren Group. The numbers indicate the threat second liens pose to hopes of a housing recovery.

Because borrowers with second liens are much more likely to be underwater, they are also more likely to default. But with two competing lenders to satisfy, properties with second liens are much harder to resolve through modification or short sale.

Banker and Tradesman examined single-family and condominium purchases during the Massachusetts real estate boom. Between 2003 and the end of 2007, 320,000 single-family and condominium units were purchased with at least one mortgage, and are still owned by the original buyer.

Using an automated valuation model, which takes into account current market conditions, the data suggests that approximately 148,500 of those buyers, or 46 percent of the original buyer group, are underwater.

But the data is even more troubling when the effect of second liens is examined.

Of the total pool of 320,000 we examined, about 103,000 units – roughly one-third of the total – have second liens attached. And of those, approximately 71,000, or 69 percent, are estimated to be underwater. Compared to homes with only one mortgage, homes with second liens were twice as likely to be underwater, according to The Warren Group.

But even as the federal government revamps its efforts to help underwater homeowners by encouraging banks to allow more short sales and principal write-downs, many of the borrowers most in need of that help will find themselves hamstrung by second liens.

Looking at how second liens affect short sales can help illustrate the essence of the problem. A short sale occurs when a home is sold for less than what the homeowner owes on the property. For properties with more than one lien (like a second mortgage or home equity loan), all lien-holders must sign off for a sale to go through.

Leslie Del Monaco, a Century 21 Realtor in Leominster, began representing a short sale buyer in a transaction last fall. According to Del Monaco, papers were filed “in October, [and] we got approval [from the first lien holder] two months ago. I’ve been trying to get approval for the second one, and if I don’t have it [soon] the first approval goes away.” If that happens, “we’re going to have start all over again, and so there goes another six months.”

New federal incentives aim to help, but no one is sure if they will resolve the central conflict of interest that hampers short sales with second liens. The argument might best be summed up as the problem of two fists trying to squeeze the same stone – if one relaxes its grip, whatever thin stream of income that’s extracted may flow to the other lien holder.

Realtors, attorneys and others who try to facilitate short sales report that second lien holders often seek about 10 percent of what’s owed to them. But first lien holders frequently offer only a fraction of that sum.

“Your hands are tied with the second lender until the first lender has done their homework, and then it becomes a cat and mouse game between the two lenders,” said Rochelle Jonsworld, owner of Keller Williams Realty North Central in Leominster. “I’ve had as many as five or six [price assessments] done on one short sales process,” she said, as banks go back and forth to come to their own determinations of value in a volatile market.

“That’s why these are so hard, you don’t live in the world of a normal deal,” said Jon Davis, a partner at Stanton & Davis in Hingham who has represented lenders and buyers in foreclosures and short sales. Davis said he had a deal fall apart recently in which an interested buyer was looking to purchase a property from a borrower in danger of default, because approval couldn’t be obtained from the second lien-holder.

Of course, along with all this quibbling between lenders, there’s an oft-overlooked third party to the transaction – the buyers. During the months of wrangling, most keep looking for homes, and the longer the process drags on, the more likely they are to find another property in their price range that doesn’t carry the baggage of a short sale.

Del Monaco has seen buyers burned.

“I had one two days prior to closing where the bank pulled the approval,” she said. The buyer had already sold his previous home and was having all his possessions trucked to the new property; he had to divert them to storage. Such experiences have led Del Monaco to decline to list short sales, and to warn buyers about them.

“It’s not worth it. It’s just too much risk to the seller and buyer, and it’s too much emotional risk as well,” she said.