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Mortgage loan modifications: home equity lenders lend a hand

[Jan 27, 2010.]


Bank of America has agreed to modify some of its home equity loans in cooperation with the government's Home Affordable Modification Program (HAMP). Without such cooperation, borrowers can be denied loan modifications that could save their homes.

Home equity lenders must agree to subordinate or release their liens before a first mortgage loan can be modified. Bank of America's decision to work with federal modification programs could inspire more second mortgage lenders to follow suit. Although HAMP modified 66,465 mortgages as of December 31, 2009, almost 800,000 mortgage loans remain in trial modification status.

Mortgage loan modifications: Bank of America goes the extra mile

Bank of America cites concerns that modifying the first mortgage without modifying second mortgages (which typically include home equity loans and balances owed on home equity lines of credit) may result in a modified loan that remains unaffordable for borrowers.

In a statement, Barbara Desoer, president of B of A Home Loans, suggested that modifying home equity loans would further lower borrowers' combined monthly mortgage payments. This could encourage financially challenged borrowers to stay in their homes rather than walking away from high payments on mortgage loan amounts exceeding their home's current value.

Mortgage loan modification: why your second mortgage lender must agree

Mortgage loans are secured by your home. In order to document their security interest, mortgage companies record mortgage documents with the county where your home is located. Recorded mortgage documents establish a sequence of lien holders that typically looks like this, with recording dates earliest to latest establishing priority:

  1. Your county or local property tax authority, zoning restrictions, utility easements, and other covenants affecting your property.

  2. Your primary mortgage loan (either the mortgage you used to buy your home, or a refinance mortgage loan).

  3. Your home equity loan.

Modifying your primary mortgage loan requires recording new loan documents showing the modified terms of your mortgage. If your home equity lender does not agree to record a subordination agreement, the second mortgage could move into senior position over your modified first mortgage.

Primary mortgage lenders do not allow this, so a home equity lender's refusal to cooperate would cause your primary mortgage lender to refuse a loan modification. When preparing to contact your primary mortgage lender or a housing counselor about modifying your mortgage loan, make sure to have contact information for your home equity lender available.

Home equity lenders forfeit their interest in a home when the primary mortgage lender takes title to your property through foreclosure. Given this circumstance, it makes sense for first mortgage lenders and home equity lenders to work together in foreclosure prevention programs.


About Author:

Karen Lawson is a freelance writer with extensive experience in mortgage banking and home loan loss mitigation programs. She holds BA and MA degrees in English from the University of Nevada, Reno.

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