One of the many downfalls for the home owner when trying to stop foreclosure with the Obama plan is a second mortgage. The plan did not entice holders of these home equity loans and 80/20 second liens (where a second loan was granted with the first to allow a 100 percent loan without mortgage insurance) to participate in a mortgage modification.
For instance, if consumer purchased a home for $200,000, the lender would give a first loan for $175,000 and another second loan for $25,000. This second $25,000 loan can be made by the same lender or another company all together.
If the first lender modified the loan under the Presidents plan, it could not impact the second loan. Often the plan would get turned down when the second lender refused to cooperate.
In an attempt to deal with this, the new plan gives lenders of second loans a financial incentive to cooperate. It also helps the reduction of payments by the second lender a little.
The headlines on this do not discuss the real world difficulties of this new plan.
First, the servicers of second loans must still agree to be involved. So far 11 lenders have basically agreed to participate in the first rendition of the Obama plan. Who knows how many will participate in this updated plan for seconds. These 11 lenders, however, make up a considerable percentage of the first loans made. Seconds may be different as they are generally smaller than the first and they know that the holder of the first mortgage is more prone to modify as it has more to lose in the event of a foreclosure.
Second, the holder of the second mortgage must first accept changing the loan to the same length of the first. Most of these loans, and particularly home equity loans, are shorter than the first, normally 5, 10, or 20 years. This forces the lenders to change their normal term by extending them to the usual 30 years. Then they must adjust the rate to the same as the modified first mortgage. Only then will the government subsidize the further lowering of the payment to as low as 1 percent for amortizing loans and 2 percent for interest only loans.
Like the first mortgage program, the modified loan is for five years at the lower rate and then converts to the prime rate at that time. With all of the government spending and “printing of new money” the value of the dollar will probably drop significantly and interest rates may go up as high as ten percent, in our opinion. The payment goes up one percent per year until it hits that new interest rate.
Will this really help the home owners?
This situation places quite a burden on the lender of the second mortgage. Will the second holders participate? No one knows. How will the holders of the first and second “balance the pain” of payment reductions? In our opinion, the chances of two completely different servicers, or holders working together is nearly impossible. Especially when it looks like the second will have to take a loss.
Just like the first rendition of the Obama plan, this may create a “black hole” where the untrained staffs of the servicers of the first and second simply do not know what to do.
There goes the easy government solution for saving your home!
We shall see where all of this leads but, suffice it to say, the poor borrower is in no position to effect the negotiation between the holders of the first and second mortgages.
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