Wednesday, April 29, 2009

Housing Plan and Second Mortgages

The needed part of the Obama Housing Plan foreclosure modification on second mortgages was released yesterday. Let's take a look at a few articles and their analysis on the plan. First from the Washington Post's article titled Foreclosure Prevention Plan Expanded to 2nd Mortgages -

The administration's housing plan pays lenders to help borrowers stay in their homes by modifying their mortgages to an affordable level. But, the plan as first announced in February applied only to primary mortgages. Now, lenders will be eligible for payments when they modify the terms of a second mortgage, including a home-equity line.

About 50 percent of at-risk borrowers have a second mortgage, which can make it difficult for them to afford their homes even after payments are cut on their primary mortgages. Second mortgages were popular during the housing boom for buyers who could not afford big down payments.

Under the new plan, lenders would receive $500 for modifying the second mortgage, plus $250 a year for three years if the loan remains current. The borrower would be eligible for $250 a year for five years to lower their principal balance. The borrower could have the interest rate lowered to 1 percent, depending on the type of loan, with the government sharing the cost of the rate reduction.

Senior administration officials said they expect the second-mortgage program to help 1 million to 1.5 million of the up to 4 million households expected to be covered by the wider loan-modification program. The program, which will take several weeks to get running, will be paid for through bailout funds already allocated to the program, officials said.


The Treasury Department also is attempting to breathe new life into another government foreclosure prevention program, called Hope for Homeowners. That program, launched last year, refinances homeowners into more affordable mortgages. But lenders have balked at requirements that they cut some of the principal that borrowers owe. Only one homeowner has received a government-backed loan under the program so far.

Before getting into the new plan - only 1 homeowner was helped by Hope for Homeowners??? Now back to the current second mortgage plan - since the program is voluntary and the incentives are not that high we would be surprised if other than lenders that held both mortgages there was little movement on this front.

But let's take a look at another article to see what else we can find out. From the New York Time's article titled A New Plan to Help Modify Second Mortgages -

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.


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.


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.

Lowering the interest rate may work. But the financial incentives seem to low to really do anything.

So let's end with this Reuters article titled Q&A: U.S. Treasury's "second-lien" mortgage relief plan that gives us an example of what the plan in practice would look like -

A family that borrowed $45,000 on a second mortgage in 2006 with an 8.6 percent interest rate would see their monthly payment drop to $154.81 from $349.48 under the program for amortizing loans. With the interest rate slashed to 1 percent, their savings would be over $2,300 a year for five years.

Another family that borrowed $60,000 on an interest-only second mortgage in 2006 now at 4.4 percent would see their monthly payment drop to $100 from $220 under the program. By reducing the rate to 2 percent, this would result in an annual savings of $1,440 for five years.

An investor who agrees to extinguish a second-lien mortgage that is 120 days delinquent with $40,000 owing could get $1,200 for extinguishing the lien and relinquishing a claim on the property.

The first two examples seem feasible and realistic - the third example seems like there would be resistance. But we'll see...

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