By: Stephanie Armour
April 21, 2010
The Obama administration's initiative to help homeowners obtain modifications of second mortgages is getting off the ground.
Citigroup, JPMorgan Chase and Wells Fargo joined the program in March, when updated guidelines were issued by the government.
Those banks hold about half of the USA's second liens.
The program, originally introduced in August, is aimed at overcoming an impediment to permanent modifications of first mortgages.
Holders of first mortgages have been reluctant to take losses unless the holder of the second-lien mortgage does, too. More borrowers are staying current on their second mortgages, however, which has made those lenders less inclined to take losses.
"This is a huge concern for consumers," says Marietta Rodriguez, national director for homeownership and lending at national non-profit NeighborWorks America. "You have two financial institutions trying to get a payment out of you. How do you respond?"
The government's second-mortgage program, called 2MP, offers incentives to borrowers, mortgage servicers and investors to modify second mortgages. How it works:
- When a borrower's first loan is modified under the federal program, known as the Home Affordable Modification Program (HAMP), and the servicer of the second loan is also a participant in HAMP, that servicer must offer to modify the borrower's second lien.
- Servicers can stretch the term of the second loan to 40 years.
- Second-lien lenders must defer the payment of the same proportion of principal that was deferred or forgiven on the first loan.
Modifying a mortgage with a second lien can be more difficult because of the additional parties involved.
A second lien may be held by another servicer or investor, and getting all parties to agree on interest rate reductions or other steps to ease borrowers' monthly payments can be time-consuming or difficult. The government program aims to make the process easier.
The number of homeowners who will get assistance is limited.
While the program is expected to reach up to 1.5 million homeowners who are struggling to afford their mortgage payments, there are an estimated 19 million residential junior liens, with an average balance of $57,000 as of January, according to First American CoreLogic.
Up to 50% of at-risk mortgages have second liens, according to the Treasury Department.
Even with the incentives the government is offering mortgage lenders to modify second mortgages, they could still prove to be an obstacle as pressure grows to reduce borrowers' loan principal.
"First-lien holders become more reluctant to do principal reduction because of the second" lien, says Jack Schakett, loss mitigation strategies executive at Bank of America. "Everyone is calling for doing more principal reduction. Second liens will be a problem."