By Jeff Brown
Last winter the Obama administration launched an ambitious Making Home Affordable program to help up to 9 million homeowners avoid foreclosure. But the plan did not address a potential stumbling block: About half of troubled homeowners have second mortgages such as home equity loans.

To fix that, the Treasury Department on Tuesday announced a revision to drastically reduce or eliminate homeowners’ payments on second mortgages. Although it will take several weeks to get up and running, you can keep an eye out for details at the program’s web site.

The two Making Home Affordable programs apply only to primary residences, not to vacation homes or investment properties.

One program allows people with homes owned or insured by Fannie Mae (Stock Quote: FNM) or Freddie Mac (Stock Quote: FRE) to refinance to fixed-rate loans with lower rates and payments.

The second program gives lenders and mortgage investors incentives to modify existing mortgages to reduce payments to no more than 31 percent of the homeowner’s income.

Though lenders’ and investors’ participation is voluntary, many were expected to take part because they would lose less by modifying loans than by foreclosing and trying to resell properties in today’s beaten-down market.

Many mortgage investors objected, however, because lenders on second mortgages would not share the losses, but they would benefit from the homeowners’ improved ability to pay after a first-loan modification. The program’s new features address that.

A second mortgage is any loan secured by the property but subordinate to the first mortgage. If the homeowner defaults, the lender on the first mortgage gets paid first after a foreclosure. Any money left over goes to the lender on the second mortgage.

Home equity installment loans and lines of credit, or HELOCs, are second mortgages if there is also a first mortgage.

Under the revision, the mortgage servicer, which is typically the firm that receives your monthly payment, must modify the second loan if it modifies the first, with the government helping ease the lenders’ losses.

For second mortgages which require principal payments as well as interest payments, the interest rate will be slashed to 1 percent for five years. On interest-only loans it will be cut to 2 percent. The Treasury site has examples of how these modifications would work.

Lenders will receive $500 for each second loan modified, plus $250 a year for three years if borrowers keep up-to-date on payments. Alternatively, the servicer can wipe out the second mortgage in exchange from a lump-sum payment from the government.

While the lenders would take deep losses, they might lose less than in foreclosure, where they may get nothing after first-mortgage lenders received foreclosure proceeds.

To see if you qualify for a loan modification, fill out the questionnaire on the Treasury web site. Generally, the loan must be for less than $729,750 on a primary residence, payments must be more than 31 percent of gross income and you must be able to show that you are having trouble paying because your payments have gone up, your income has fallen or you’ve suffered a financial hardship like medical bills.

To start the loan modification process, contact your servicing company. There should be an 800 number on your payment coupon.
Also see if you qualify for the refinancing program. Use the Refinance Interest Savings calculator to see how a reduced interest rate could cut your monthly payments.

And if you don’t qualify for either Making Home Affordable program, you might be able to refinance on your own. Use the BankingMyWay.com shopping tool to search for a 30-year fixed-rate loan. According to the BankingMyWay.com survey, those are averaging a low 5.15 percent.

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