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New Federal Guidelines Highlight Role of Home Equity Loans in Relief Efforts

[Apr 28, 2009.]


The US government has announced  new guidelines and incentives for modifying secondary mortgage loans. These loans, commonly called home equity loans, can impact  homeowners' ability to make mortgage payments on their primary mortgage loans, and can also impede efforts to modify primary mortgages. As an incentive, loan servicers of home equity loans would be paid $500 initially, and $250 annually for three years for modifying a second mortgage. Additional guidelines have been issued for secondary mortgage holders to voluntarily release secondary mortgage loans under certain circumstances.

When homeowners take out a home equity loan or line of credit, they may not be aware of potential implications if they experience financial problems later. Here are some possible scenarios:

  • Second mortgage wiped out by foreclosure of primary mortgage:In cases where a homeowner has a primary mortgage and a home equity loan or line of credit, the secondary mortgage  can be wiped out if the first mortgage holder forecloses. Secondary mortgage holders may protect their interest by advancing funds to the first mortgage holder to bring past due payments current.

  • Secondary mortgage holder can advance funds and foreclose: If a second mortgage holder advances funds to the first mortgage holder for payment of delinquent mortgage payments, they will likely demand immediate repayment of funds advanced. A homeowner's failure to repay the amount advanced by the secondary mortgage lender can lead to foreclosure of the second mortgage loan.

  • Deal or no deal--subordination agreements: Homeowners attempting to modify their first mortgage liens through government programs or lender loss mitigation programs may encounter problems with their second mortgage holders. A second liehnolder may not agree to subordinate its interest to the modification of the first mortgage. This eliminates the possiblilty of modifying the first mortgage.

  • Impact on Short Sales: Primary mortgage lenders generally require secondary mortgage holders to release their interest before agreeing to accept a short sale. The first mortgage holder knows that if it forecloses, the second mortgage holder will receive nothing, so first mortgage holders typically refuse to allow any payment to a second mortgage lender on a short sale. This can make the difference between satisfying a first mortgage loan through a short sale, or completing foreclosure, which can stay on consumer credit reports for up to ten years.

These kinds of problems emphasize the importance of cooperation between first and second mortgage lenders in negotiating modification terms for their respective loans. Unfortunately, if a first mortgage lender and a second mortgage lender fail to agree on modification terms, the homeowner has little recourse. The new government incentives may prompt more second mortgage lenders to agree to modification or releasing second mortgage loans.


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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