Bank of America Signs On to Second Lien Modification Program

By:: Peter King | January 27, 2010

Bank of America has announced that it will participate in a government program to modify second liens on home mortgages, becoming the first lender to agree to do so.

The Second Lien Modification Program is intended to reduce or eliminate payments on second mortgages and home equity loans for homeowners facing financial difficulty. It is designed to work in conjunction with the government’s Home Affordable Modification Program (HAMP), which promotes loan modifications on primary mortgages.

As the nation’s largest mortgage servicer, Bank of America’s participation in the second lien program is expected to clear the way to other lenders participating as well. Bank of America currently services 14 million U.S. mortgages, including 3 million second liens. More than 100 mortgage services and lenders, representing approximately 90 percent of all outstanding U.S. mortgages, have signed up to participate in the HAMP program to date.

"For many homeowners facing severe financial difficulty, decreasing the payment on the first mortgage without a reduction in the payment on the second lien may not produce an affordable combined mortgage payment," said Barbara Desoer, president of Bank of America Home Loans.

Second liens an obstacle to loan modifications

The issue of second liens has been a significant obstacle for many homeowners seeking loan modifications under HAMP. Lenders servicing primary mortgages are often reluctant to modify them without a commitment from second lien holders to modify those loans as well. It’s estimated that half of all homeowners seeking loan modifications under HAMP have second liens on their properties.

Part of the problem is that loan modifications performed under HAMP require that a borrower’s total monthly mortgage payments be reduced to 31 percent of gross monthly income. Primary lenders are often reluctant to lower their payments to reach that figure without secondary lien holders contributing as well.

It’s hoped that addressing second liens will help clear the way for more homeowners to obtain mortgage relief under the program. More than 900,000 trial loan modifications on primary mortgages have been begun since the program was launched last spring, but only 60,000 have been approved for permanent status.

The Obama administration announced the second lien initiative shortly after launching HAMP itself last spring, but has had difficulty getting lenders on board until now. All are part of the government’s Making Home Affordable Program, which also includes an initiative to help homeowners with good credit refinance their mortgages at lower rates.

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