Loan Modification and the Second Lien Program
The U.S. government yesterday announced details of new plan aimed at helping distressed homeowners modify second mortgages. The Second Lien Program is slated to work in tandem with first lien modifications offered under the government’s Making Home Affordable Program to deliver a “comprehensive affordability solution for struggling borrowers,” says the U.S. Department of the Treasury.
Second mortgages can create significant challenges in helping borrowers avoid foreclosure, even when a first lien is modified. Up to 50 percent of at-risk mortgages have second liens, and many properties in foreclosure have more than one lien. Under the Second Lien Program, when one of the government’s Home Affordable Modification’s is initiated on a first lien, servicers participating in the Second Lien Program will automatically reduce payments on the associated second lien according to a pre-set protocol. Alternatively, servicers will have the option to extinguish the second lien in return for a lump sum payment under a pre-set formula determined by the U.S. Dept. of the Treasury.
Yesterday’s announcement may make it easier for borrowers to modify or refinance their loans under FHA’s Hope for Homeowners program. Here are two examples of how the program could work:
Family A: Amortizing Second Mortgage
- In 2006: Family A took out a 30-year closed-end second mortgage with a balance of $45,000 and an interest rate of 8.6%.
- Today: Family A has an unpaid balance of almost $44,000 on their second mortgage.
- Under the Second Lien Program: The interest rate on Family A’s second mortgage will be reduced to 1% for five years. This will reduce their annual payments by over $2,300.
- After those five years, Family A’s mortgage payment will rise again but to a more moderate level.
Family B: Interest-Only Second Mortgage
- In 2006: Family B took out an interest-only second mortgage with a balance of $60,000, an interest rate of 4.4%, and a term of 15 years.
- Today: Family B has $60,000 remaining on their interest-only second mortgage because none of the principal was paid down.
- Under the Second Lien Program: The interest rate on Family B’s interest-only second mortgage will be reduced to 2% for five years. This will reduce their annual interest payments by $1,440.
- After those five years, Family B’s mortgage payment will adjust back up and the mortgage will amortize over a term equal to the longer of (i) the remaining term of the family’s modified first mortgage (e.g. 27 years if the first mortgage had a 30 year term at origination and was three years old at the time of modification) or (ii) the originally scheduled amortization term of the second mortgage.
Here’s what U.S. Dept. of Treasury Secretary Tim Geithner has to say about the Second Lien Program:
“With these latest program details, we’re offering even more opportunities for borrowers to make their homes more affordable under the Administration’s housing plan. Ensuring that responsible homeowners can afford to stay in their homes is critical to stabilizing the housing market, which is in turn critical to stabilizing our financial system overall. Every step we take forward is done with that imperative in mind.”
Ralph R. Roberts, GRI, CRS