Home Loan Advice

The US Treasury Department recently announced that they will use $50 billion of the housing rescue fund to pay off mortgage investors. By accepting this payoff mortgage servicers will either erase the loan debt or reduce the monthly payments on the loans. This change promises to reduce the monthly payments for millions of home loan borrowers. The idea of this program is to reduce the impact of second-lien mortgage payments. Let’s look at some ways this new program may help you and others with troubled home loans.

These second lien mortgage payments were common during the housing boom a few years ago. These loans allowed borrowers to buy a home with no down payment by adding a second lien. Unfortunately, many of these loans are failing to due the recession and the ongoing problems in the housing and credit markets. Second lien mortgages are particularly troublesome since they typically carry a higher interest rate than the primary home loan. The idea behind the new Treasury plan is to use cash incentives to mortgage investors to encourage them to either reduce the interest rate on these loans or to simply consider them paid in full.

Previously, second liens weren’t considered in modification plans. This gap meant that there was some difficulty in renegotiating some loans under the ‘Hope for Homeowners’ plan. The idea of the new rescue plan is to bring the interest rate of the second lien in line with the primary mortgage interest rate with the hope of making the loan payments more affordable for borrowers. The Obama administration is hoping that this plan will reduce the cost of homeownership for up to 9 million homeowners who’re struggling to make their monthly mortgage payments.

These changes and some others are expected to improve the performance of the Hope for Homeowners plan. So far, the performance has been dismal and only a few homeowners have had loans modified effectively. The Department of Housing and Urban Development (HUD) hopes that this new plan that will offer mortgage holders thousands of dollars for each home loan that they successfully modify will improve the effectiveness of the program and help it meet its goal of keeping people in their homes. HUD also announced that they would be working to reduce the bureaucratic red tape involved in securing a home loan modification through the program.

It is hoped that the biggest sticking point, second liens which are sometimes called ‘piggyback loans’, will be adequately addresses by these changes. Previously there was little incentive for holders of these second mortgage loans to cooperate with a loan modification plan. The Obama adminstration is banking on these new policies to improve the situation since these piggyback loans are attached to around half of all troubled mortgages. It was common for borrowers who had poor credit scores, who did not have proof of income or who couldn’t fully qualify for a loan to take out these second liens. But, because previously there was no incentive for second loan holders to negotiate a mortgage modification plan, this made it difficult for many people to get the house payment reduction they needed. The new plan should help get rid of this oversight in the home loan modification program.

The way the plan is supposed to work is that mortgage companies would get an incentive of $500 for each loan they modified and then $250 a year for three years provided that the borrower doesn’t default on the home loan. The borrower themselves would get up to $1000 over a 5 year period to apply to the principal balance of the primary mortgage. There are some additional backend incentives to help mortgage companies recover expenses as well, such as a $2500 payment for participation in the plan.

The Obama administration has been disappointed with the performance of the plan so far. The ‘Hope for Homeowners’ plan was intended to help around 400,000 homeowners who held troubled mortgage loans replace risky sub-prime loans with traditional 30-year fixed rate mortgages with reasonable interest rates. However, the plan hasn’t worked well since the plan, as it was originally implemented, was financially unattractive to banks and it was difficult for homeowners to qualify. In fact, only one loan was modified under this plan between January and March. It is hoped that these new incentives, especially in the area of second lien mortgages, will help improve the program so that it assists more homeowners in trouble.

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