With changes announced today, the Obama administration hopes to revive a government program that was designed to refinance underwater borrowers into FHA loans. In addition, the administration has addressed second liens that have been holding up many modifications.
A second-lien program has participating servicers automatically reducing payments on second liens when a first mortgage is modified under the Home Affordable Modification program. A pre-set protocol will determine the amount of the second-lien payment reduction.
The government will pay investors for half of the cost of reducing the interest rate to 1 percent on amortizing second liens and 2 percent on interest-only mortgages. After that, second-lien loan terms need to be extended to the same term as the modified first mortgage. Next, the principal balance needs to be reduced by the same share as the first mortgage.
The interest rate will adjust in five years to the same level as the first-mortgage rate at that time, and the balance will be re-amortized over the remaining term. On interest-only loans, the loan term at five years will be equal to the longer of the remaining first-mortgage term or the original second-lien term, while the amortization will begin as scheduled in the original note.
Servicers will be paid $500 per modification completed with an additional $250 per year for each year up to five years that the loan remains current. Incentive payments for borrowers who remain current are $250 a year for up to five years and applied to first-mortgage principal.
Servicers will also have the option of accepting a lump-sum payment on the second when it is most appropriate. Lenders will be paid three cents on the dollar for seconds that are past due more than 180 days, while payouts range from 4 percent to 12 percent on loans less than 180 past due depending on the back-end debt-to-income ratio and combined loan-to-value.
In all, as many as 1.5 million borrowers are expected to benefit from the second lien program — including half of existing participants in the Home Affordable Modification program.
“The program ensures that first and second lien holders are treated fairly and consistent with priority of liens,” a fact sheet said.
Another change by the administration has the Hope for Homeowners program established under The Housing and Economic Recovery Act of 2008 becoming part of the Making Home Affordable program.
Under the revised plan, servicers participating in the Home Affordable Modification program will first be required to attempt to qualify borrowers under the H4H program. On successful H4H modifications, servicers will receive a $2,500 incentive, while lenders will receive $1,000 pay-for-success payments for up to three years as long as the loan remains current.
“These additional supports are designed to work in tandem and take effect with the improved and expanded program under consideration by Congress,” the Treasury stated. “The administration supports legislation to strengthen Hope for Homeowners so that it can function effectively as an integral part of the Making Home Affordable Program.”
