Hope for Second Mortgage Holders

The Treasury Department yesterday released its new improved “Making Home Affordable” (MHA) program that will now offer assistance for second mortgages, such as home equity loans, in addition to assistance with first mortgages. The administration announced the MHA in February and released the details in early March. Tuesday’s announcement addressed the expansion of MHA as well as more support for the Hope for Homeowners program. Treasury estimates that 50 percent of “at risk” mortgages also have second liens. Under the new program, both first and second mortgages would be modified “in tandem.” Interest rates on second loans would be reduced to one percent, unless they are interest-only loans, in which cases the rate would be two percent. The term of the modified second loan would be extended to match the term of the modified first mortgage. After five years, the interest rate on the second would be adjusted to the same rate as the modified first mortgage, and the second mortgage would be re-amortized over the remaining term at the higher rate. The MHA also includes “pay for success” incentives for servicers and borrowers similar to those announced for first mortgage relief.

The MHA will pull the Federal Housing Administration’s (FHA) Hope for Homeowners program under its umbrella so that servicers will be required to evaluate borrowers’ eligibility for the advantages of both programs. Twelve servicers have signed contracts to make modifications under the MHA. Under Hope for Homeowners, mortgage holders “accept a payoff below the current market value of the home, allowing the borrower to refinance into a new FHA-guaranteed loan.” Only 51 Hope for Homeowners programs have closed since October 2008.

The Treasury also addressed the administration’s support for legislation that would allow the FHA to reduce borrower’s fees; increase lender flexibility to refinance troubled loans; and permit borrowers with higher debt burdens to qualify for relief. The legislation, sponsored by Senate Banking Committee Chairman Chris Dodd (D-CT), has raised concerns with bondholders because of the “servicer safe harbor for mortgage loan modifications” section. Under this provision, servicers would be protected from legal liability should pooling and servicing contracts be violated during the course of making certain loan modifications. The House passed the provision last month along with cram-down language, and the Senate is due to take up the bill later this week. We are hearing that although the Senate bill does not include the cramdown language, neither Sen. Dodd nor Sen. Dick Durbin (D-IL) is likely to offer it as an amendment.

Making Home Affordable Program Update (PDF)

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