Government Tackles Second Mortgages

[Apr 28, 2009.]

 

The Obama administration announced plans today to address homeowners who are unable to afford the payments.

During the real estate boom, many homeowners used home equity loans and lines of credit to purchase a new home with little or no money down. These second mortgages were also used by many borrowers who took advantage of rising property values by extracting cash from the equity in their homes.

Banks were lending to people with credit challenges, borrowers who could not or did not want to document their income, and some even lent up to 125 percent of the value of someone's home - with the expectation that real estate prices would continue to soar.

Now, these second mortgages are making it difficult for many homeowners to avoid foreclosure. Some are having success in having the terms modified on their primary mortgage, however, without modifying the terms of their home equity line of credit or home equity loan, the homeowner will be unable to meet their monthly obligations.

Obama's previous foreclosure prevention initiatives have been criticized for not doing enough and for not addressing the second mortgage issue.

Under a new program, the government will pay mortgage servicers $500 upfront and $250 a year for three years for successfully modifying a second mortgage, such as home equity loan.

Senior administration officials Tuesday told reporters they expect a significant amount of big banks to sign up for the updated federal program to bring relief to troubled homeowners. Once those firms sign necessary contracts, they'll generally be obligated to modify second liens when they've initiated a modification on the first, the officials said. They also noted that the second lien program will be funded by the $50 billion in Troubled Asset Relief Program, or TARP, funds the administration had already projected to use for home affordability efforts.

To qualify for payment, servicers must extend the term of the second mortgage and reduce the interest rate to match the first mortgage. Then, the government will share the cost with the servicer of reducing the rate down to 1% for amortizing loans and 2% for interest-only loans.

Separately, the administration will release a schedule of incentives for holders of second mortgages to extinguish those liens voluntarily.

 

About Author:

Chris Rocks is the Regional Director of the National Credit Federation (NCF), a consumer advocacy group that assists small business owners and consumers overcome debt and credit challenges.