A New Plan to Modify 2nd Mortgages

This explains very well what is going on with second mortgages and should be helpful to those who may need some assistant with over-encumbered property. Here is the link, and the article in its entirety.

http://www.nytimes.com/2009/04/29/business/economy/29housing.html?_r=1

Published New York Times April 28, 2009

By Edmund L. Andrews

WASHINGTON — The Obama administration sought to expand its $50 billion plan to reduce home foreclosures, announcing a new program on Tuesday to help troubled homeowners modify second mortgages or piggyback loans.

Under the new plan, the Treasury Department will offer cash incentives and subsidies to lenders who agree to substantially reduce the monthly payments on second mortgages or forgive those loans entirely.

The goal of the plan is to plug a hole in the administration’s original program, which offered subsidies to lenders who agreed to modify the primary or first mortgages of homeowners who had fallen delinquent or were in danger of doing so.

But millions of homebuyers took out second mortgages to buy houses with little or no down payment or to finance home improvements and other purchases. Those second-lien mortgages have to be renegotiated separately, a step that often complicates efforts to modify the primary loans.

Analysts predict that at least 4 million homeowners will face foreclosure proceedings this year, up from about 2.2 million in 2008. Administration officials said about half of those people had second mortgages.

Under the new plan, which will be financed out of the same $50 billion set aside in March from the Troubled Asset Relief Program for homeowner bailouts, mortgage lenders that sign up for the program will agree to an automatic formula for sharply reducing payments on the second mortgage for any customers who have modified their first mortgage.

Under the original program, the Treasury offers cash incentives to lenders to reduce a borrower’s monthly payments to 38 percent of monthly income. The Treasury then shares half the cost of further reducing the payments to as low as 31 percent of the borrower’s monthly income.

Under the new program, which officials said would not get under way for at least several weeks, participating mortgage lenders would agree in advance to automatically reduce the interest rates and possibly the outstanding loan amounts for a second mortgage as soon as the first mortgage had been modified.

Lenders would be required to lower the interest rate to just 1 percent for any second mortgage in which the borrower was repaying principal as well as interest. On interest-only loans, the lender would have to reduce the rate to 2 percent. If the lender on the first mortgage agreed to forgive some of the principal loan amount, the second-tier lender would have to forgive the same share of its loan as well.

To induce mortgage lenders to participate, the Treasury is offering lenders a $500 cash incentive for each second loan they modify and additional payments of $250 a year for three years if the borrower stays current. The Treasury will also share the lenders’ cost of reducing the monthly payments.

It remains unclear whether mortgage companies will be attracted to the new offer. The second-tier lenders would be making much deeper concessions to borrowers than the first-tier lenders.

But holders of second mortgages are already junior to holders of first mortgages. In foreclosures and distressed sales of homes that have dropped in value, many holders of second mortgages recoup little or none of their money.

A version of this article appeared in print on April 29, 2009, on page B7 of the New York edition.