[Updated April 2010] With a weakening housing market and impending expiration of the home buyer credit, the Obama administration and Treasury have stepped up efforts to help struggling home owners facing foreclosure, including subsidies for the unemployed and borrowers who owe more than their home is worth.
The updated/revised plan would increase payments to lenders that modify second mortgages. Banks’ unwillingness to write down second liens has helped block efforts to prevent foreclosures, and prevented current programs from helping more home owners. The administration proposed allowing more mortgages to be refinanced into FHA guarantee programs if the borrower is current on the loan. The lender would have to cut the amount owed by at least 10 percent to less than the value of the home. The first and second mortgages combined would have to be no more than 115 percent of the home’s value. More than 15 million homeowners fall into this category, according to Moody’s Analytics. About 10 million of them owe at least 20 percent more than their house’s current value.
The Treasury plan will also help unemployed homeowners reduce mortgage payments for three to six months while they look for work. If homeowners don’t find a job in that time, or if they find a new job at a lower salary, they will be evaluated for further assistance.
Further under the new programs, existing incentives will be expanded for borrowers with FHA-guaranteed loans, and relocation assistance payments will be doubled for borrowers who have to move out of residences. Servicers will be required to consider principal write downs when modifying loans and the Treasury will offer incentives for principal reductions.
The revised plan and new programs will get additional funding from the $700 billion Troubled Asset Relief Program and money from $50 billion already set aside for housing programs. $14 billion will be allocated to the FHA guarantee programs.
I know a lot of friends and family who took on a second mortgage to enable them to buy a home a few years ago during the housing boom. Unfortunately, these “bridge loans” or second mortgage’s – which enabled them to get a lower rate loan (because the primary loan could then be eligible for purchase by Fannie and Freddie) – have now come back to bite them as house prices fall.
However, political pressure is growing on U.S. banks to ease terms for distressed homeowners on home-equity loans and other second-lien mortgages. The WSJ reports that Rep. Barney Frank, chairman of the House Financial Services Committee, last week sent a letter to the four biggest U.S. banks demanding “immediate steps to write down second mortgages.” This is occurring as the Obama administration prepares to launch long-planned initiatives aimed at addressing obstacles to restructuring mortgages (more on this next week)
Rep. Frank said banks’ reluctance to write down second mortgages is hurting government efforts to reduce the primary (first) mortgage balances of many borrowers who owe farm more on their loans than the current values of their homes. Reducing the mortgage balance typically requires cooperation from both the first- and second-mortgage holders. Because such “underwater” borrowers often feel little incentive to keep paying, “homeowners are increasingly deciding to walk away and thus foreclosures continue to mount,” Mr. Frank said.
Many second mortgages have little value because of the plunge in home prices, Rep. Frank wrote, adding: “Yet because accounting rules allow holders of these seconds to carry the loans at artificially high values, many refuse to acknowledge the losses and write down the loans.” About $1.05 trillion of second or junior-lien home loans were outstanding as of Sept. 30, according to the Federal Reserve.
Lack of cooperation from holders of second mortgages also can block short sales, in which the first-lien lender allows the home to be sold for less than the loan balance to avoid foreclosure. If the second-lien holder continues to press its claim, the sale can fall through. The ensuing foreclosure is likely more costly for all parties than a short sale would have been.This has been blamed for the failure in various government housing programs to try and reduce the number of foreclosures.
Thus, under an Obama administration program due to begin in the next few weeks (subscribe via RSS or email to get the latest updates), many borrowers who get reduced payments on their first-lien mortgage through the administration’s Home Affordable Modification Program would automatically get a break on their second mortgage. Bank of America has agreed to take part and other big lenders are expected to follow suit.