Loan Modification and the Second Lien Program

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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.”

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Ralph R. Roberts, GRI, CRS
Award-Winning REALTOR® and Author
Loan Modification For Dummies (avail. Summer 2009)

4 Comments

  1. This makes sense, as it modifies the 2nd mortgage, too. 2nd mortgages were popular in the increasing value markets, such as southern FL, Vega, and CA, so a lot of homeowners should be able to take advantage of this program.

  2. Christine Harms Says:

    I just found this website today and enjoyed reading all the comments-very informative. I too am looking for a modification on a Countrywide held I/O mortgage of $400,000. Is Bank of America now handling these? It is impossible to deal with anyone from Countrywide as they are terribly rude and inconsiderate. I also just happened to read my loan docs last weekend and found a huge misrepresentaion of my husband’s “stated income”! The paperwork showed him making $13,000/wk (!!) when in face it was only $1,000/wk. Where do I turn for help? Due to a loss of income (self employment) he is now working for someone else and making much less. We are still current on our mortgages but getting close to falling behind. Thanks in advance for any advice.

  3. It sounds great. I only wish more lenders would sign on to the program. It is impossible to get these people to move.

  4. Liz Says:

    The second lien program would be immensely helpful to underwater borrowers. Is there any indication whether and when it could be signed into law? In general, how can we keep tabs on the status of proposed programs like this one?

    I am trying to decide whether to refinance only my first mortgage now or wait it out until I could also improve the rate on my second mortgage, which bears interest at a MUCH higher rate.

    Thank you!!

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