NorCalSavant

Last week Treasury announced the Second Lien Program to work in tandem with the primary mortgage modification under the Home Affordable Modification Program to help homeowners avoid foreclosure.  Treasury also announced new lender incentives under the beleaguered Hope for Homeowners Program for underwater homeowners.  Are these new programs going to make a difference in continuing foreclosures?  Is there new hope for a homeowner facing foreclosure in the worst affected markets in California, Nevada, and Florida?

Second Lien Program

As I had discussed in my earlier post here, the Home Affordable Modification Program reduces mortgage payments on the primary debt for homeowners close to defaulting or foreclosing.  However, the Home Affordable Modification Program did not automatically modify the payments on any secondary lien on the house.

Source - http://www.flickr.com/photos/respres/2539334956/

With the Second Lien Program, payments on the second mortgage will be sharply reduced by participating mortgage lenders according to a set formula for any customers who have modified their first mortgage.  For borrowers paying principal and interest on the second mortgage, the interest rate would be lowered to just 1%.  For borrowers paying interest only, the interest rate would be lowered to 2%.

If any part of loan balance was forgiven by the lender on the first mortgage, the same proportion of the second mortgage would be forgiven.  The second lien can also be extinguished for a lump-sum payment according to a pre-set formula determined by Treasury.  Basically for second loans due payment for more than 180 days, the lender will be paid three cents on the dollar for extinguishment.  For loans past due less than 180 days, the lender would be paid anywhere from four to twelve cents on the dollar for extinguishment depending upon loan to value (LTV) and debt to income (DTI) ratios.

Besides sharing the cost of reducing monthly payments with the lender, Treasury is also offering lenders $500 cash incentive upfront and $250 a year for three years if the buyer maintains payments after loan modification.

Hope for Homeowners Program

The Treasury is also trying to revive its beleaguered Hope for Homeowners Program (H4H) by offering new incentive payments for lenders and requiring mortgage servicers participating in Home Affordable Modification program to evaluate if the borrower could qualify for H4H.  Treasury will pay lenders $2,500 at the time of H4H refinance and $1,000 a year for up to three years if the borrower continues to make mortgage payments on time.

H4H refinance potentially offers a homeowner facing foreclosure a way to reduce loan balance to 96.5% of the current home value.  The remaining loan balance will be written off by the lender as a loss.  However, the borrower must be able to qualify for an FHA (Federal Housing Administration) loan, has to pay mortgage insurance premiums, and has to share any gains from selling a home in future at an appreciated price with the government.

The Impact on Foreclosures

So, is it all wonderful?  Will these new initiatives be the last nail on the coffin burying homeowner defaults and foreclosures?  Well, not quite.

Treasury itself says that the Second Lien Program will help reduce mortgage payments for one to one and a half million borrowers out of the three to four million homeowners estimated to be helped by the original Home Affordable Modification program.  It is not expected to expand the pool of borrowers expected to be helped any more than the primary mortgage modification program.  It will streamline the process in that the uncertainty in dealing with the second mortgage on a house will be eliminated for those qualifying for the Home Affordable Modification program.

The H4H program was launched last year amid much fanfare, and has been a miserable failure.  It has helped a grand total of one homeowner avoid foreclosure so far.  The lenders have opted to take the loss at foreclosure rather than take a loss by cutting some of the principal that borrowers owe.

With the new announcement, lenders could pocket up to $5,500 for modifying a loan balance down to 96.5% of the current house value.  However, the H4H program does not require a lender to modify the loan balance.  It is left to the lender’s fiscal interest/judgment to decide whether to modify the loan balance or not.

Simple math suggests that $5,500 is not enough of an incentive when the house value has dropped precipitously in expensive markets like California, Nevada and Florida.  The new program might nudge some lenders to cut down the loan balance for some homeowners facing foreclosure, but it is not likely to help the vast majority of homeowners facing foreclosure.

The Obama administration was also trying to get legislation passed in Congress allowing bankruptcy judges to alter loan terms and shield mortgage firms from investor lawsuits when they ease loan terms.  The House passed the legislation, but the Senate left out the provision to allow bankruptcy judges to modify the loan balance.

With the potential threat of mortgage reduction by a judge gone, there is little likelihood of a lender cutting down the loan balance for a foreclosing homeowner.  Foreclosures, meanwhile, continue as the economy and unemployment go from bad to worse.  At least 4 million homeowners are estimated to face foreclosure this year compared to about 2.2 million homeowners in 2008.

So, all in all, Treasury’s new Second Lien and Hope for Homeowners Programs are unlikely to add new foreclosing homeowners to the pool of those likely to be helped by existing programs.  The programs are unlikely to substantially stop the continuing drum beat of additional foreclosures.

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