While the Obama administration has been pushing lenders to modify loans rather than foreclose, most attention has been paid to first mortgages. But what about second mortgages? Rates on those are always higher than firsts, and it's been a popular way for homeowners to draw on equity, and thus, get in trouble.
And so, the government is now offering lenders incentives to cut rates on second mortgages, with a taxpayer-funded plan which could cut second mortgage rates to as low as 1% for the next five years for
qualifying borrowers.
This seems like an add-on to the previously announced Making Home Affordable program, and was unveiled in a press release on Wednesday. Here's how it's described:
The Second Lien Program announced today will work in tandem with first lien modifications offered under the Home Affordable Modification Program to deliver a comprehensive affordability solution for struggling borrowers. Second mortgages can create significant challenges in helping borrowers avoid foreclosure, even when a first lien is modified. Up to 50 percent of at-risk mortgages have second liens, and many properties in foreclosure have more than one lien. Under the Second Lien Program, when a Home Affordable Modification is initiated on a first lien, servicers participating in the Second Lien Program will automatically reduce payments on the associated second lien according to a pre-set protocol. Alternatively, servicers will have the option to extinguish the second lien in return for a lump sum payment under a pre-set formula determined by Treasury, allowing servicers to target principal extinguishment to the borrowers where extinguishment is most appropriate.
The Treasury gave case examples (.PDF). One example:
Family A has an unpaid balance of almost $44,000 on their second mortgage.
Under the Second Lien Program: The interest rate on Family A’s second mortgage will be reduced to 1% for five years. This will reduce their annual payments by over $2,300.
After those five years, Family A’s mortgage payment will rise again but to a more moderate level.
It's unclear where the "moderate level" assurance comes from.
Many have said that before the economy recovers from recession, the housing market must recover. This is a further step in that direction, but will it be enough?
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