Treasury Department's "Making Home Affordable" Program Attempts to Tackle 2nd Lien Dilemna

The Government finally realized that 2nd mortgages and their debt servicers provide a major stumbling block to all loss mitigation efforts when present.  The 2nd lien holders are well aware of the powerful position that they hold (which was once thought as the weakest being in the junior position) and they use what leverage they have to jam up a possible successful modification or short sale. Most loss mitigators cringe at the sight of that 2nd lien on a title search, knowing they are going to face unreasonable monetary demands, threats of promissory notes etc. from the intractable 2nd lien holders.

Is the Treasury Department's incentives enough? Many of the large banks are signing on, but how many of them hold 2nd liens? Only time will tell....

Treasury Releases New Details of Making Home Affordable
Carrie Bay | 04.28.09

The U.S. Treasury announced details on Tuesday of new efforts to help bring relief to responsible homeowners under the Making Home Affordable Program. The new program components include an initiative that specifically addresses modifications on second lien mortgages and a set of measures intended to provide assistance to those borrowers who are underwater – meaning the value of their home is less than the outstanding balance owed on their mortgage.

Senior administration officials told reporters on a media conference call Tuesday afternoon that these new efforts are key pieces of President Obama's mortgage relief plan and are critical to achieving the administration's objective of bringing greater affordability and stability to American homeowners.

Second Lien Modifications

According to the Treasury, up to 50 percent of at-risk mortgages have second liens, and many properties in foreclosure have more than one lien. Second mortgages can create significant challenges for borrowers trying to bring their payments current, even when a first lien is modified. The new Second Lien Program announced Tuesday will work in tandem with first lien modifications offered under the Home Affordable Modification Program to deliver real affordability for struggling homeowners, the Treasury said.

Under the Second Lien Program, when a Home Affordable Modification is initiated on a first lien, the servicer will communicate the specifics of the modification to the second lien servicer, if applicable. Those servicers participating in the Second Lien Program will then “automatically” reduce payments on the associated second lien according to a pre-set protocol. For amortizing second liens, the servicer will reduce the rate to equal that of the modified first mortgage, and the government will then reduce the rate even further, down to 1 percent. On interest only second liens, the same equation will apply, but the government will reduce the rate down to 2 percent.

As with the Home Affordable Modification Program for first mortgages, the government will pay out an array of incentives. Servicers will receive incentive payments for each second lien modification made – $500 upfront and $250 a year for the first three years of the successful life of the modification. Investors will receive a subsidy payment from the government for the allowance of a modification, and borrowers will receive incentives paid toward the principal reduction of their first lien, as long as they stay current on the second lien payments -- $250 a year for up to five years. Government officials stressed that the amount of each incentive hinges on borrower performance.

Alternatively, servicers will have the option to extinguish the second lien in return for a lump sum payment under a pre-set formula determined by the Treasury, which will allow servicers to wipe out that added debt where it is deemed appropriate for the borrower situation.

A White House spokesperson said that tackling the issue of second liens has proven to be “a challenge operationally.” He said this new program addresses the problem faced by some homeowners who continue to struggle under the weight of a second mortgage, and he said the government expects the Second Lien Program to accelerate lender's participation in the Home Affordable Modification Program because it will support greater affordability and thus sustainable modifications.

Relief for Underwater Borrowers

The administration also announced steps to incorporate the Federal Housing Administration’s (FHA) Hope for Homeowners program into Making Home Affordable, to provide assistance to those homeowners who are deep underwater on their mortgages due to plummeting property values in virtually every housing market around the nation.

Hope for Homeowners was introduced to the industry last fall, but has not had much success so far, largely due to complicated borrower requirements and the typical second lien snag. The administration wants the FHA program to work in parallel with Making Home Affordable to yield principal write-downs for those homeowners who may not qualify for a government modification because they owe more on their home than it is worth.

Hope for Homeowners requires the holder of the mortgage to accept a payoff below the current market value of the home, allowing the borrower to refinance into a new FHA-guaranteed loan. This process takes a borrower from a position of being underwater to regaining equity in their home.

When evaluating borrowers for a Home Affordable Modification, servicers will be required to determine eligibility for a Hope for Homeowners refinancing. Where Hope for Homeowners proves to be viable, the servicer must offer this option to the borrower. The Treasury said servicers and lenders will receive pay-for-success payments for Hope for Homeowners refinancings similar to those offered for Home Affordable Modifications. But to lure wary lenders toward the FHA program, the administration is offering significantly higher payouts – a $2,500 upfront payment to servicers that refinance borrowers into the program, and $1,000 a year for the first three years that the loan stays current to lenders that originate the new FHA-backed mortgage.

This alternative avenue to provide mortgage relief to the nation's many underwater homeowners will take effect along with the expanded program guidelines currently pending in the Senate. The administration said such legislation is necessary “to strengthen Hope for Homeowners so that it can function effectively as an integral part of the Making Home Affordable Program.”

Making Home Affordable Coverage

According to the Treasury, more than 75 percent of all loans in the United States are covered under the administration's housing program. Treasury officials explained that between the servicers who have already signed contracts to begin federal loan modifications – including the nation's five largest lenders – and the share of loans owned or securitized by the GSEs Fannie Mae or Freddie Mac, more than three-quarters of the nation's mortgages are eligible for government relief.

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Tags: mortgage, FHA, Fannie Mae, Treasury, Making Home Affordable, modification, subprime, wall street, foreclosure, under water

Comments

[Michael Schneider]

The bsaic idea is that the second lien is tied in lockstep to the modification of the first, following the precise schedule established by the Treasury.

The terms seems sound and reasonable, frankly. Financial institutions with large 'troubled' second lien portfolios on their balance sheets will, I think, need to take substantial write-downs. I haven't estimated the NPV of the modified cash flows, but if we take the range of 3% to 12% in the schedule for extinguishing, then the write-down is going to be large.

Bad for regional banks with home-equity loans on portfolio. But, probably just forces the inevitable, which is probalby part of the objective of the Treasury.

Here's the part I don't understand, perhaps you can provide some insight:

Suppose the first is securtized and serviced by Bank A, and the second is on portfolio of Bank B. Bank A modifies the first.

The value of the program would seem to be that Bank B is required to modify the second, whenever the first modified.

So, under the program is Bank B required to modify the second? And if so, does the Treasury really have the authority to require Bank B to modify?

cheers,

michael schneider

[Kathleen Scanlon]

Well, Under this Program yes Bank B will be required to modify the second and they have the authority to do so if Bank B signs up with the Treasury to participate in the Home Affordable Program.

Lets see if it works because the second lien holders have been difficult and many homes end up going to auction because of them

[John Broad]

I have two seperate lenders for the 1st mortgage and the second mortgage. I can't get the holder of the first mortgage (B of A) to contact the second lien holder and get the ball moving on the overall loan modification. Any suggestions.