Loan Modification When There's a Second Mortgage
Anyone with a second mortgage who has tried to get a loan modification understands the term "exercise in futility" very well. The existence of a second mortgage creates a new obstacle for the borrower, and the efforts of lenders and servicers to come out on top can run the homeowner right into foreclosure (to the detriment of all involved). HAMP's Second Lien Modification Program (2MP) is finally getting off the ground; it remains to be seen whether this plan will alleviate the roadblock that has hampered the success of many loan modifications.
The standoff between first and second-lien holders stems from the fact that, in the case of a default, second mortgage lenders are only supposed to be paid after the first mortgage lender has been paid. So that's why first mortgage lien holders and investors -- which include pension funds, hedge funds and insurance companies -- are understandably reluctant to OK modifying their loans and taking losses when the second mortgage holders' loans remain intact. In the case of default/foreclosure, the second-lien holder will likely get nothing. However, a first-lien modification usually puts the borrower in a better fiscal position -- a better position to make payments on the un-modified second lien, that is.
Is There Loan Modification Help for Borrowers with Second Mortgages?
While 2MP has been in place for a year, and while lenders holding about half of all second liens in the country have signed up, the program has yet to modify a single mortgage. One impediment is that new changes to HAMP offer the possibility of a principal reduction when the first mortgage is modified. However, many lenders take the position that they will not grant a principal reduction on a first mortgage until the second mortgage is completely extinguished.
2MP Finally Under Way
After almost a year, 2MP is finally getting off the ground. Bank of America has announced that it is sending out letters advising its eligible home equity customers that they may be able to get modifications. The following servicers have also announced they are on board: Citigroup, JP Morgan Chase, Wells Fargo, BayView Loan Servicing, LLC, Servis One dba BSI Financial Services and iServe Servicing, Inc. Under 2MP, borrowers can get fully-amortizing second mortgage rates dropped to as low as 1% for five years, and those with interest-only loans are eligible for 2% interest rates.
Under the program, if you get a HAMP modification on your first mortgage, AND the servicer of your second mortgage is signed up for the program, the second-lien holder MUST offer to modify your second mortgage. The second-lien holder must also stop all foreclosure action against you and it is not required to verify the financial information submitted to your first mortgage lender. The fact that you have been granted a modification on your first mortgage is deemed to be sufficient proof of imminent default.
The Second-Lien Modification Process
Servicers must follow the standard modification steps below to modify the second lien.
Step 1: Capitalization of Arrearages
Late fees must be waived, and past due interest is added to the balance of your second mortgage, bringing it current.
Step 2: Reduce Interest Rate
The interest rate on your second mortgage is reduced to 1% (for fully-amortizing loans) or 2% (for interest-only loans) for five years, after which it will be stepped up to equal the rate on your modified first mortgage.
Step 3: Extend Term
If the original term of the second lien is shorter than the remaining term of the HAMP-modified
first mortgage, the term of the second lien is extended at least enough to match the term of the modified first lien. At its discretion, a servicer can stretch a loan out to 40 years, regardless of the term or amortization period on the first mortgage.
Step 4: Principal Forbearance
If there is principal forbearance or forgiveness on the HAMP-modified first mortgage, a servicer
must forgive principal on the second lien in at least the same proportion.
Presumably, the advantage to the first lender in all of this is that a modified second mortgage makes it more likely that the borrower will continue to make the modified payments on time for the first mortgage and avoid defaulting. Borrowers with first and second mortgages who have been ineligible for HAMP mods due to a second mortgage should see if their second-mortgage servicer is participating in 2MP, and take another run at getting a modification.
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Gina Pogol has been writing about mortgage and finance since 1994. In addition to a decade in mortgage lending, she has worked as a business credit systems consultant for Experian and as an accountant for Deloitte.
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