By Brian O’Connell
The Obama administration has thrown a spotlight on a key housing-crunch obstacle, the second mortgage. They’re not easy to bundle into a home sale and that fact has kept many homeowners from selling, and from modifying their home loans.
But help from Washington, DC might be on the way.
Here’s the skinny. Second mortgages are a major migraine for borrowers looking for a loan modification deal. To qualify for a new home loan, many consumers who took out second mortgages, usually in the form of home equity loans (or “piggyback” loans, as critics call them) are seeing lenders deny approval for loan modification programs.
Banks were eager to make such loans available and many homeowners took the bait. According to the White House, “millions” of Americans took out second home loans between 2003 and 2007.
Government estimates say that approximately half of all troubled mortgages in the U.S. have second mortgages attached to them.
But first-and second-mortgage loans are treated differently from an accounting standpoint. In a word, mortgage borrowers who have second mortgages, and who are trying to get their mortgage modified, require approval from both the company that holds the original mortgage, and the lender who holds the second mortgage. What muddies the water even more is that the lenders are usually different. Consequently, a loan modification process with a second mortgage can be a complicated process, chock full of dicey negotiations, paperwork, and a good chance that the second mortgage holder won’t agree to the loan modification deal.
So what is the Obama administration proposing? By and large, the plan is to use taxpayer money to pay off second mortgage holders and clear the way for more loan modification deals.
The government is throwing $50 billion into the pot, money that will be used from Uncle Sam’s “bailout” funds. Specifically, the government will pay mortgage companies $500 for each modified loan, plus $250 a year for three years (but only if the borrower does not default on his or her mortgage).
Borrowers get another break as well. In addition to having their mortgages modified, they’ll get $1,000 a year for five years applied to their mortgage principal amount. In addition, they’re also likely to get a lower interest rate with taxpayers making up the difference to mortgage lenders. The U.S. government could also help pay for some of the administrative costs for borrowers, as well. According to the White House, mortgage companies participating in the government’s loan modification program will also earn an additional $2,500.
The U.S. government estimates that the new second mortgage plan will help 1.5 million consumers holding more than one mortgage. With a program geared to removing that second mortgage roadblock, look for more struggling homeowners to apply for the program.
To see if you qualify for a loan modification deal under the government’s Home Affordable Refinance, check out their web site.
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