Second Mortgage Push

About half of the borrowers  at foreclosure risk are carrying a second mortgage. When the Obama Administration’s Home Affordable Modification Program was unveiled, it took months to address the second mortgage problem. Now lenders working with first mortgages under the program must modify any second mortgages they hold on the property at the same time. Lenders also get financial incentives, a payment in advance of $500 with additional remunerations of $250 a year for up to three years on second mortgage mods. Lenders are also offered a financial incentive for forgiving the second lien of up to $1000.

Still second mortgages remain a stumbling block for loan modification.Congressman Barney Frank, the chairman of the House Financial Services Committee, sent a letter last week to the to chief executive officers of Bank of America, Citigroup, J.P. Morgan Chase and Wells Fargo, the four biggest US banks urging them in “the strongest possible terms to take immediate steps to write down these second mortgages.”

The Massachusetts Democrat went on, “Large numbers of these second liens have no real economic value – the first liens are well underwater and the prospect of any real return on the seconds is negligible.” He states that “Many homeowners are eager to save their homes despite being ‘underwater’ but find that lenders and servicers are unable or unwilling to make necessary modifications. These homeowners are increasingly deciding to walk away and thus foreclosures continue to mount deepening the crisis.” Frank explains that he wrote the letter to the four top bankers because the problem “has reached a critical stage and requires immediate attention from your institutions.” Chairman Frank plans to follow his letter with phone calls this week.

Second loans can also trip up short sales where the prime lender agrees to accept less than an home is worth in a sale to avoid the expense of a foreclosure. A second mortgage holder can effectively block the sale if the second lender continues to press a claim.

Next month, the Obama Administration is due to further modify its foreclosure prevention plan for those who can’t afford a loan modification. The new plan puts a greater emphasis on short sales and deeds in lieu of foreclosure. Holders of second mortgages would be eligible for 3% of the unpaid loan balance, to a maximum of $3,000, in exchange for relinquishing all claims in a short sale. The program would be voluntary, so it’s unclear how many lenders would participate. According to the Federal Reserve Bank, about $1.05 trillion in second lien mortgages were held by American Banks as of the end of the third quarter 2009.

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