The Treasury Department> announced an initiative to help homeowners who have thus far been excluded from the government's bailout initiatives: those who either hold a second mortgage or owe more on their home than it's worth (also known as being underwater).
The government says the new program could help reduce second-mortgage payments for one million to 1.5 million homeowners, or up to half the participants in its Making Home Affordable mortgage modification program, which it launched nearly two months ago.
The news comes when nationwide home prices continue to slide. Ten of the 20 metropolitan areas measured by the S&P/Case-Shiller Home Price Indexes showed record rates of annual declines, according to data released Tuesday.
Just how effective the government's new program will be is hard to predict, but the fact that 12 of the largest servicers in the country, representing 75% of all outstanding loans, have signed up is a good sign, says Sharon Price, director of policy at the National Housing Conference, a nonprofit advocate for affordable housing. The reality is not everyone will get help, but the more families [that] can stay in their homes, the less home prices in their communities will decline, she says.
Here s a breakdown of the how those with second mortgages and those who are underwater on their loans could benefit from the government's latest housing bailout:
Borrowers with second loans
The government s Making Home Affordable program failed to address second loans. As a result, many borrowers who applied for a modification of their primary mortgage payment continue to pay high interest rates on their second loans. Under the new guidelines, however, servicers are required (and incentivized) to modify second loans or even receive an incentive for writing the loan off altogether.
According to the government's plan, servicers will be required to lower interest rates on second mortgages to 1% for five years and extend the term of the second mortgage to match the term of the first mortgage. For interest-only loans, rates would be temporarily reduced to 2%. For each successful loan modification, servicers will be paid $500 upfront, and then another $250 per year for three years as long as the loan remains current.
The government will also offer lenders an incentive if they extinguish the mortgage altogether. Depending on how many days a loan is past due at the time of modification and the borrower s debt-to-income ratio, the government will pay lenders anywhere from three to 12 cents per dollar of the extinguished unpaid principal balance. (This may seem like small incentive, but often the second lien holder will receive nothing if the homeowner loses the property to forecloses.)
Borrowers will also receive incentives -- beyond just better payment terms on their second loans. They can receive up to $250 a year for five years if they stay current on the modified second loan. The cash will be applied directly to the principal of the first mortgage.
The government launched the Hope for Homeowners program last October, in an effort to help borrowers who owe more on their home than the property is worth -- which, thanks to falling home prices, includes many homeowners these days.
The program s aim: to allow borrowers to refinance into new loans that are up to 96.5% of the home s market value. The lender then is supposed to write down the balance in excess of that amount and, in return get a percentage of the home s appreciation when it was sold.
Unfortunately, because lender participation was voluntary, only a handful of people have been helped, according to Price. (The Department of Housing and Urban Development, or HUD, which runs the program, did not return calls seeking comment.)
The new rules, however, will provide cash incentives to servicers and lenders that originate a refinanced loan as part of the Hope for Homeowners program. Servicers can receive a $2,500 upfront payment for a successful Hope for Homeowners refinancing. Additionally, servicers who are processing loan modifications as part of the Making Home Affordable program will be required to evaluate if a borrower qualifies for refinancing under the Hope for Homeowners guidelines and, if so, to offer them the opportunity to do so. Those who originate the Hope for Homeowners refinanced loans are eligible for up to $1,000 a year for up to three years as long as the loan is current.