Friday, May 1, 2009

Foreclosure Fix Expanded To Cover Second Liens

This week, the Obama administration announced that it will expand its $75 billion foreclosure prevention effort to cover second mortgages.

Many delinquent borrowers complained after the modification plan was announced in February that they were being left out because their home values had dropped. The administration moved to address the concerns by tweaking the original modification plan, which calls for adjusting eligible borrowers' loans so monthly payments are no more than 31% of pre-tax income.

Loan servicers recently started taking applications. Servicers covering 75% of the nation's mortgages are now participating in the program, which enables some homeowners with little or no equity to refinance. The plans are expected to help up to 9 million homeowners to avoid foreclosure, according to a senior administration official

Up to 50% of at-risk borrowers carry second liens, a popular option during the housing boom that enabled borrowers to put little or nothing down when buying a home. These loans have complicated the modification process, adding to delinquent homeowners' debt loads. Mortgage investors also have balked at reducing payments on first mortgages when the second loan was left intact.

Under the new plan, the interest rate on second mortgages will be reduced to 1% on loans where payments cover interest and principal and to 2% for interest-only loans. The government will subsidize the rate reduction, with the money going to the mortgage investor.

Servicers will be paid $500 for each modification and an additional $250 annually for three years if the borrower stays current. Borrowers can receive up to $250 per year for five years to pay down their first mortgage.

Investors also can receive a payment in exchange for extinguishing the second lien. They would receive 3 cents on the dollar for loans more than 180 days delinquent and between 4 cents and 12 cents for less delinquent loans, depending on the borrowers' debt levels.

Servicers who join the new program must modify second loans when a borrower's first mortgage is adjusted. It likely will take a month to implement, but it should not slow down the modifications of primary mortgages, the administration said.