Thursday, March 5, 2009

Extinguishing HELOCs

That is part of what the Obama Housing plan does. Lets take a look at Calculated Risks evaluation of the program from the Mortgage Modifications and 2nd Mortgages -

The second mortgage sections are interesting.

This first reference to 2nd liens seems to be part of Home Affordable Refinance Program (Part I of the plan).

From the Making Home Affordable, Updated Detailed Program Description Fact Sheet

Second Liens:
While eligible loan modifications will not require any participation by second lien holders, the program will include additional incentives to extinguish second liens on loans modified under the program, in order to reduce the overall indebtedness of the borrower and improve loan performance. Servicers will be eligible to receive compensation when they contact second lien holders and extinguish valid junior liens (according to a schedule to be specified by the Treasury Department, depending in part on combined loan to value). Servicers will be reimbursed for the release according to the specified schedule, and will also receive an extra $250 for obtaining a release of a valid second lien.

So the 2nd lien holder will have a choice: do nothing, or take some unspecified compensation to extinguish the 2nd.

Then there is this section that seems to be in Part II: Home Affordable Modification Program Housing Counselor Q&As:

What if the borrower has a second mortgage and would like to apply for a Home Affordable Modification?

Under the Home Affordable Modification program, junior lien holders will be required to subordinate to the modified loan. However, through the Home Affordable Modification an incentive payment of up to $1,000 is available to pay off junior lien holders. Servicers are eligible to receive an additional $500 incentive payment for efforts made to extinguish second liens on loans modified under this program.

Is that saying they will pay the 2nd holder up to $1000 under Part II?

Many lenders are already unwilling to subordinate their loans. For many HELOCers a $1000 incentive is a mere fraction of what is owed. Also - refinancing with cash out is also not, NOT a part of the package. No equity withdrawals with this program. Here are some more important answers to the Making Home Affordable part of the program -

6. What are the eligibility criteria for a Home Affordable Refinance?

•The property must be owner occupied,
•The borrower must have sufficient income to support the new mortgage debt, and
•The first mortgage may not exceed 105% of the current market value of the property. For example if the property is worth $200,000, the borrower must owe $210,000 or less.

7. What if a borrower has a second lien and the total debt on the property exceeds 105%?

The borrower may still be eligible for a refinance if the first lien does not exceed 105% of the value of the property and all junior lien holders agree to subordinate to the new first mortgage.

8. May borrowers take cash out to pay other debts?

No, only transaction costs may be included in the refinanced amount.

9. Can delinquent borrowers apply for the refinance option?

No. Borrowers who are currently delinquent on their mortgage will not qualify. You should contact your servicer to see if a Home Affordable Modification is an option for you.

We wonder the impact of program participation will have on opening lines of credit in the future...

1 comment:

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