Hot Off the Press - New Housing Rescue Bill Will Aid Second Mortgages

One stumbling block in recent housing stabilization efforts was that the programs only addressed first mortgages. Yet, at least half of seriously delinquent homeowners have second mortgages or home equity lines of credit. A newly passed bill addresses this concern.

When the first Obama plan was announced, investors protested that their loans were jeopardized. As things stand, second mortgages are repaid second if the borrower becomes insolvent. Often the same banks service the same loans which created a conflict of interest. As a practical matter, if the first mortgage was modified and the second wasn't, the homeowner could still have too much debt to stay current on one or both or them.

On April 28, the administration proposed a revised plan that suggested that both mortgages will be modified for participants in the federal programs. The government will pay part of the cost of reducing the interest rate on the second mortgage for five years or will help those who hold second mortgages pay down the debt. This would mean an upfront payment of $500 and $250 a year for three years to mortgage servicing companies. Borrowers who remained current on the modified loan would receive $250 a year for up to five years to help pay down their first mortgage.

The plan encourages people to refinance through the Hope for Homeowners program, a well-intentioned program intended to help 400,000 that has only helped 51 people to date. As originally drafted, the program offered few incentives for lenders to participate. In fact, the regulations were so complex, the fees were so high, and the amount of loss the bank has to absorb so great that banks ran from the program. Borrowers were disqualified or put off by some of the requirements: primary residence loans only, no previous mortgage defaults, higher insurance rates on the loan.

The refurbished plan, pumped up with $2 billion in Wall Street bailout funds, would settle homeowners in an FHA-backed 30 year loan and address many concerns of homeowners, lenders, investors, and communities. Many of the 12 banks who cover more than 75% of the first mortgages in this country are supportive of the new plan. The bill passed the Senate on May 7. Now it remains to be seen if the lenders and borrower jump on board.

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