Loan-Modification Plan Revised to Address Second Mortgages

Loan-Modification Plan Revised to Address Second Mortgages

By RUTH SIMON WSJ

The Obama administration on Tuesday laid out new guidelines for its foreclosure-prevention program that aim to address one key stumbling block to its efforts to stabilize the housing market: how to deal with borrowers who have home-equity loans and other second mortgages.
About half of seriously delinquent borrowers have a second mortgage, according to Credit Suisse Group. Yet when the administration two months ago announced its $75 billion program to help stabilize the housing market, the plan drew criticism from investors who own mortgage-backed securities because it didn't address the question of second mortgages.

Investors, who include pension funds, insurance companies and hedge funds, say that rewriting the first mortgage without touching the second violates their rights, because second mortgages are supposed to be repaid second. They also say the original Obama plan created a conflict of interest, because many loans are serviced by big banks that also hold second mortgages -- and, as a result, have a financial interest in how these loans are handled.

Under the revised plan, mortgage-servicing companies that participate in the loan-modification program for second liens must automatically modify the second mortgage when the first mortgage is reworked. The government will share in the cost of reducing the interest rate on second mortgages for five years. As an alternative, it will pay holders of second mortgages to extinguish that debt.

Mortgage-servicing companies that modify second mortgages will receive an upfront payment of $500 and additional payments of $250 a year for up to three years for successful modifications of home-equity loans and other second mortgages. Borrowers who remain current on the modified loan would receive payments of $250 a year for up to five years that would be used to pay down the balance of their first mortgage.

The revised plan also encourages the use of the federal Hope for Homeowners program, which allows borrowers to refinance into a more affordable, government-backed loan, provided the investor who holds the mortgage agrees to a principal write-down.

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