Relief from Second Mortgages

I was in line at the grocery store the other day. A woman started talking to me and I could tell she was stressed. I asked her what was bothering her and she started telling me a story that sounded like many I have heard on the news. She bought a house about four years ago. She didn't have any money to put down, so her lender gave her what was called a "piggy back" loan. This allowed her to avoid paying mortgage insurance. Things were going well, and then she lost her job right about the time she found out one of her kids were sick. Slowly she ate away at her savings until there was nothing left, and before she knew it she was behind on her mortgage.

She tried everything. The lender was unresponsive to her many requests. She felt relieved when in mid-February it sounded as if there was help on the way from the government. Her relief, however, was short lived. Since she had a second mortgage that wasn't held by the same lender as her primary mortgage, her second mortgage holder thwarted any efforts to save her home. She had to file for bankruptcy protection in order to try to buy some time to help save her home.

I thought of her this morning when I read about President Obama's Making Home Affordable Program Parallel Second Lien Program. Basically, the Obama administration has taken the steps to ensure that second lien holders, much like that of the lady at the grocery store, don't stop people from saving their homes.

The program is has two basic options: lower the payment or extinguish the debt.

Under the first method, interest rates will drop to 1% for individuals whose payments include both principal and interest components. Rates will drop to 2% for those who only make interest payments. Furthermore, the lender will be required to honor a forbearance in the same proportion of the forbearance granted by the primary lien holder. There's also the option of debt extinguishment under the extinguishment table.

Under the second method, lenders can extinguish the second lien in exchange for larger payments that are calculated by a pre-set formula. For servicers dealing with loans over 180 days past due, the servicer will be paid 3% of the unpaid principal balance that is extinguished.

As always, the success of the program is dependent on the response of the mortgage servicers. It's sad, but many mortgage lenders and servicers would like to help homeowners but feel like they can't because they fear legal retaliation from investors. What they don't realize is that for many Americans, not being able to participate in a program such as that concocted by the Obama Administration will mean that many homeowners will have no choice but to walk away from their homes!

While the program is a good start, I think a good option would be for the government to REQUIRE compliance with their programs aimed at saving homes. They could require a review on a case-by-case basis and make a decision based on, among other things, future ability to pay and financial situation. This would not mean that everyone would get to keep their home, but it might keep a bad problem from getting worse. If someone is willing to pay for their home, even if it takes them sixty years, they should be given at least a meeting with a loan officer or government aide.

I will never know if Obama's new program helped the lady I spoke with in the grocery store. Her situation may have been to dire to warrant any help. At any rate, I hope and pray every night that responsible Americans are given the option of keeping their homes.

Resources:

http://www.usnews.com
www.ustreas.gov