When first launched last month, the Obama foreclosure plan was geared to deal with primary mortgages, but according to Credit Suisse Group, about half of badly delinquent borrowers also carry a second home loan. With falling equity, these borrowers have been placed in an untenable position. Now the Obama Plan is poised to help with clear and consistent standards.
Mortgage servicers who take part in the loan mod plan for primary mortgages, who also have a second on the property, must modify the second when the first mortgage is redone.
For amortizing loans, with monthly interest and principal payments:
- the government will share the cost of reducing the interest rate to 1%, stepping up to the same rate as the first after five years
- The term of the modified second mortgage will be extended to match the first.
- The principal will have a forbearance equal to any given for the first.
For interest only loans:
- The government will share in the cost of reducing the interest rate to 2% stepping up to the same rate as the first after five years
- The principal will have a forbearance equal to any given for the first.
- The terms will extended to match the longer of either the modified or original first mortgage.
Lenders will get a preliminary payment from the government for $500, with an additional $250 a year for three years. Borrowers who keep up their payments on the modified loan will get a credit of $250 a year to their first mortgages for up to five years.
A big challenge arises when the first and second mortgage are held by different lenders. Simply getting a loan modification on the primary mortgage under these circumstances does not guarantee that the second will be modified. Yet being in debt with a second mortgage will no longer hold up the modification of the first.
The second mortgage interest rate is nearly always higher than the first, since this loan takes a subordinate or junior position to the first mortgage when it comes to the property lien. Modification of the second mortgage with a different lender requires a separate negotiation. A key element is stressing the LTV – loan to value of the property – at current market rates. There is a good possibility that in some areas the second mortgage is no longer backed by any equity in the home. In these cases forgiveness of the second mortgage can be a better option for the lender. Here the Obama plan will offer 3 cents per dollar of any unpaid balance to wipe the slate clean on any loan that is 180 days past due at the time of primary mortgage modification. The holder of a second mortgage can offer a full release, a lien release, or a partial release of the loan converting it to a signature loan.
Remember, if you’re taking steps to modify your first mortgage, it’s essential that you also deal with your second. Excessive payments here can sink your efforts to get your personal finances back above water.
