A new initiative to help resolve issues with second liens that have presented problems for many homeowners seeking assistance with problem mortgages was announced today the Obama Administration.

The new initiative ties loan modifications obtained on a primary mortgage under the Making Home Affordable program to mandatory changes in the second lien as well. It also provides incentives for lenders to extinguish second liens in certain circumstances.

The administration also announced other steps to help more at-risk borrowers through FHA's Hope for Homeowners program, by folding it into the administration's Making Home Affordable Program.

Links primary, second mortgages

Previously, homeowners obtaining mortgage relief under the Making Home Affordable program might have been able to reduce their payments on a primary mortgage, but still faced high payments on a second mortgage that could cause them to still lose their homes. Now, modifications to a primary mortgage under Making Home Affordable will automatically trigger modifications in the second mortgage as well, provided that both are held by lenders participating in the program.

The administration estimates that the Second Lien Program could help reduce payments for up to 1.5 million homeowners, as many as half of those obtaining mortgage modifications under the Making Home Affordable Program. It reports that as many as half of all at-risk mortgages include a second lien, and that many homes in foreclosure have more than one lien.

Under the initiative, the Treasury Department will share with lenders the cost of reducing the interest rate on an amortizing second mortgage to one percent for five years, and to two percent on interest-only loans. After five years, the rate will rise to match the current interest rate on the modified first mortgage.

Cash incentives for lenders, borrowers

Lenders will be able to qualify for a $500 incentive for each second mortgage successfully modified, plus additional payments of $250 per year for up to three years, as long as the loan stays current. Borrowers who remain current on their payments will be able to receive payments of up to $250 a year for five years, that will be applied to the principal on their primary mortgage.

The Second Lien Program also provides incentives for lenders to extinguish second liens in certain circumstances, offering payments ranging from three to 12 cents on the dollar for delinquent second loans unlikely to be repaid. The hope is that eliminating the second loan may make the primary loan payments affordable for the delinquent borrower, who will then be able to hold onto the home. Because the primary loan has first claim to the property in a foreclosure, lenders may find this a more attractive option than a foreclosure that might not yield them anything.

Hope for Homeowners eligibility

In addition, mortgage servicers evaluating borrowers for loan modifications under Making Home Affordable must now also determine their eligibility for a refinancing into a new loan under Hope for Homeowners. The Hope for Homeowners program is designed for borrowers whose homes have lost value and owe more on their mortgage than the home is worth.

Under Hope for Homeowners, the lender writes down the value of the mortgage to 90 percent of the homes current market value, in return for FHA guaranteeing the new mortgage. The homeowner gets a reduced mortgage payment and equity in the home, and the lender avoids the cost of foreclosure and further losses on the property, in addition to an FHA guarantee on the new balance.

The Hope for Homeowners program has struggled since it was initiated last fall, burdened by fees and regulations that made it unappealing to both homeowners and lenders. Backed by $300 billion in funding, it was originally predicted to aid up to 400,000 families. But the FHA reports that by April 15 it had received fewer than 900 applications and approved just over 50 loans.

New legislation passed by the House and now before the Senate is hoped to make the program more appealing by eliminating many of the fees and reducing the amount lenders would be required to mark down qualifying mortgages.

Published on April 28, 2009