Earlier this week, the government announced new provisions to Obama’s Making Home Affordable plan that will target homeowners with second mortgages who have not already been helped by the government’s foreclosure rescue plan, reports the Mercury News (“U.S. Revises Program to Help Homeowners Facing Foreclosure,” April 29, 2009).

“Ensuring that responsible homeowners can afford to stay in their homes is critical to stabilizing the housing market, which is in turn critical to stabilizing our financial system,” Treasury Secretary Timothy Geithner said in a statement (“Treasury Announces New Plan to Aid Mortgage Holders,” Bloomberg, April 28, 2009).

The administration’s second-lien program will build on Obama’s original mortgage rescue program by allowing homeowners who have their first mortgages modified under the plan to automatically have the payments reduced on their second mortgage, as long as their second-mortgage lender also participates in the government’s plan.

New Program May Help 2 Million Homeowners

Second mortgages have been a major stumbling block so far to alleviating the housing crisis, administration officials say.

About half of all troubled homeowners also have a second mortgage, usually in the form of a home equity line of credit, and these homeowners frequently run into a problem with lenders when trying to modify the terms of their primary mortgage. Oftentimes, the holder of a homeowner’s second mortgage refuses to grant permission to modify the first mortgage.

But with the new second-lien provisions in place, administration officials anticipate that another 2 million homeowners, especially those with second mortgages, will be able to avoid foreclosure, in addition to the 4 million homeowners projected to be helped under the original mortgage modification plan.

Expanded Incentives to Servicers, Homeowners

Servicers, lenders, investors, and homeowners could receive up to $2,450 in incentive fees through the new second-mortgage program, Bloomberg reports, if homeowners have their second mortgage modified in addition to their primary mortgage.

The servicers of second mortgages would pocket an upfront $500 fee as well as $250 per year for three years, for a total of $1,200 over the life of the modified loan. And as long as the homeowner remains current on the second mortgage, the government will apply $250 per year for five years to the principle of the first mortgage.

According to the Mercury News, the program also allows lenders to completely wipe out a homeowner’s second mortgage in return for a lump-sum payment from the government, which would be calculated based upon an undisclosed formula.

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