U.S. offers 1% second-mortgage rates via modification plan

The Obama administration is trying yet another program to stem home foreclosures -- this time by offering lenders incentives to cut payments on second mortgages.

The taxpayer-funded plan aims to slash second-mortgage interest rates to as low as 1% for the next five years for qualifying borrowers.

The Treasury said the program would work in tandem with the Making Home Affordable plan it launched in February, which focused on incentives to get lenders to modify first mortgages for people who have a fighting chance of holding on to their homes.

The problem for many distressed homeowners is that they have both first and second mortgages -- and can’t afford either. Treasury now wants lenders and loan servicers to agree to modify both loans as part of a "comprehensive" solution.

"Up to 50% of at-risk mortgages have second liens, and many properties in foreclosure have more than one lien," Treasury said in its announcement today.

Under the new program, the government would share lenders’ cost of reducing second-mortgage interest rates. For second-mortgage loans that amortize (those with monthly payments that include principal and interest) the loan rate would be cut to 1% for five years. For interest-only loans the rate would be cut to 2%.

The fact sheet for the program is here.

Lenders also could opt to forgive a second mortgage entirely in exchange for a one-time government payment.

The Treasury estimated the plan could help up to 1.5 million second-mortgage borrowers, although it didn’t say how it arrived at that number.

In one example the Treasury provided, a homeowner with a $44,000 second-mortgage loan at 8.6% would see his monthly payment slashed from $349 to $155 with the new rate at 1%, for an annual savings of $2,336.

The risk with the new program: After five years, loan rates would step up again. This could be just another case of delaying foreclosure, not preventing it.

-- Tom Petruno

Photo credit: Brian Vander Brug / Los Angeles Times

Comments

[Lavern K. Aungst]

I have a home equity on my house. Can I qualify for 1% home equity?

[Tom Petruno]

@Lavern: To qualify for loan modification under the government's plan, you have to first show that you're having trouble making payments. And as the blog post noted, the government only wants to modify second mortgages in tandem with modifications on first mortgages. This is not about cutting interest rates for all home-equity lines and other second liens -- it's for people who say they're in financial trouble. If you're looking for a break on your home equity loan, you need to talk first to your lender -- that's where the process has to begin.

You also can look here for more info:

http://makinghomeaffordable.gov/modification_eligibility.html

Tom Petruno

[David]

I just re-financed my home 1st mortgage and was told that the government was looking into a 1% option on a second mortgage for home owners. I am not in any foreclosure dificulty but wanted to know more about this, and how it would effect me.