Second lien servicers and investors are the big winners in changes to the Administration’s loan modification program announced April 28. 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. Loans would ne modified to match modifications of the primary loans, as low as one percent. And the government shares the cost of the rate reduction.
That’s a big improvement over writing down their loans to zero interest with no incentives and no government subsidy, as the plan originally proposed.
Borrowers also do well. They’re eligible for $250 a year for five years to lower their principal balance. The borrower could have the interest rate lowered to one percent for five years.
The changes unplugged a stalemate that threatened to bring the Obama program to a screeching halt. Half of all at risk borrowers have second liens-second mortgages or home equity loans.
The program is finally moving forward. Twelve servicers, including the five largest mortgage lenders, have now signed contracts and begun modifications under the program
The second lien program is expected to help 1 million to 1.5 million of the up to 4 million households to be covered by the program. The changes, which will take several weeks to put in place, will be paid for through bailout funds already allocated to the program.
Second lien borrowers don’t generate the same sympathy as primary loans. “The second liens, in general, were used by borrowers to either buy more home than they could really afford or to use their homes as ATM machines. Yes, some people use home equity lines of credit to pay college tuition. Diana Olick of CNBC recently wrote in her blog.
Nor do second lien lenders. “If you sign up for the first loss, you should take the first loss,” said Jeffrey Gundlach, chief investment officer of TCW Group Inc., which manages roughly $52 billion in residential mortgage-backed securities.
While primary mortgages have largely been securitized and sold to investors, banks and other financial institutions rather than own the lion’s share of home equity loans-as much as 90% of the $1.08 trillion in home-equity loans and lines of credit in the marketplace. N.J. Bank of America Corp., Wells Fargo & Co., J.P. Morgan Chase & Co. and Citigroup Inc. have the largest home-equity portfolios.
Key provisions of the second lien provision:
- Reduce the interest rate to 1 percent;
- Term of the modified second mortgage extended to match the term of the modified first mortgage by amortizing the unpaid principal balance of the second lien over a term that matches the term of the modified first mortgage;
- Principal forebears in the same proportion as any principal forbearance on the first lien, with the option of extinguishing principal under the Extinguishment Schedule;
- After five years, the interest rate on the second lien will step up to the then current interest rate on the modified first mortgage,;
- The second mortgage will re-amortize over the remaining term at the higher interest rate(s).