Tuesday, April 28, 2009

Second Mortgage Incentives

One big snag in Obama's housing plan has been the second mortgage issue. They can complicate or completely stop a refi. A second loan that must be contended with in order to stave off foreclosure. Since the original unveiling of the housing plan this past March, this one big issue has remained problematic. Well, today plan will be released. In the Wall Street Journal's article titled Obama to Unveil Incentives for Mortgage Servicers discusses some of what will be forthcoming. Let's take a look -

The Obama administration on Tuesday will unveil a fresh set of incentives for mortgage servicers to help strapped homeowners, a senior administration official told Dow Jones Newswires.

Under a new program, the government will pay mortgage servicers $500 upfront and $250 a year for three years for successfully modifying a second mortgage, such as home equity loan.

Separately, the administration will unveil a schedule of incentives for holders of second mortgages to extinguish those liens voluntarily, the official said.


The issue of second mortgages has been dogging policymakers ever since the onset of the foreclosure crisis. A large share of troubled borrowers also have a second mortgage on their home, which is typically owned by a different investor than the first mortgage. Such borrowers may not be able to afford their monthly payments if only the first mortgage is modified.

The administration's effort on second mortgages is also aimed at soothing the concerns of investors, who have been crying foul over the Obama housing plan's incentives for servicers. They argue the first mortgage shouldn't be modified if the second one is left untouched. They also contend the banks that dominate mortgage servicing are conflicted because they own more than $400 billion of second mortgages. Such banks stand to gain from modifying the first mortgage because the second mortgage is more likely to be repaid once the homeowner is saved from foreclosure.

We will be waiting to see what these incentives are. The financial incentives may be worth the closing of smaller lines and shakier clients. It is really hard to understand what the incentive for those lines that have well north of $100,000. Are lenders readily going to write-off any six figure or more mortgage? Whatever happens today this will still be a very mess issue.

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