http://www.cambridge-credit.org -- President Obama recently announced that his housing initiative was ready to expand to include second mortgage modifications. The Administration believes that ensuring a homeowners ability to stay in their home is critical to stabilizing the housing market. Once thats achieved, the logic is that the overall financial system will recover in turn. Watch this week's webisode from Cambridge Credit Counseling Corp. to learn more. Host: Community Outreach Director, Thomas J. Fox.
Transcription: Hello, and welcome to Your Money 2.0. I’m Thomas Fox, Community Outreach Director at Cambridge Credit Counseling. The Obama Administration’s Making Home Affordable program has drawn a fair amount of criticism since it was announced. However, with 6 million families facing foreclosure in the coming years and countless others struggling to stay current on their mortgage payments, help was needed.
The plan’s detractors focused on the omission of second mortgage modifications. Why should they be included? Second mortgages often complicate or prevent the modification or refinancing of a first mortgage because borrowers require permission from any second lien holder before an adjustment can be made. Now that 75% of mortgage servicers have begun participating in the Making Home Affordable program, President Obama recently announced that his housing initiative was ready to expand to include second mortgage modifications.
The Administration believes that ensuring a homeowner’s ability to stay in their home is critical to stabilizing the housing market. Once that’s achieved, the logic is that the overall financial system will recover in turn. Given the popularity of second mortgages, it stands to reason that they’ve been included in the Making Home Affordable program. This new provision will help those with amortizing loans and those with interest-only loans. For traditional amortizing loans, or loans with monthly payments consisting of interest and principal, the administration will share the cost of reducing the interest rate on the second mortgage to 1%.
Participating servicers will be required to follow specific steps to modify such loans. First, and most important, servicers must be willing to reduce interest rate to 1 percent. They’ll also need to extend the term of the modified second mortgage to the term of the modified first mortgage. After five years, the interest rate on the second lien will increase to the current interest rate on the modified first mortgage, subject to an interest rate cap.
For interest-only loans, the administration will share the cost of reducing the interest rate on the second mortgage to 2%. Similarly, servicers of interest-only mortgages will need to adhere to guidelines similar to those I just outlined for amortizing loans. Alternatively, servicers will have the option to “extinguish” the second lien in return for a lump sum payment from the government, according to a pre-set formula determined by the Treasury Department. Unfortunately, because the formula equates to just pennies on the dollar, only time will tell if many servicers agree to extinguish these liens.
The administration's second mortgage initiative will be funded out of $50 billion in financial rescue money that has already been allocated. As in the original plan, participation is encouraged through financial incentives that can be paid to servicers. Mortgage companies would receive $500 for each modified loan, plus $250 a year for three years, providing the borrower doesn't default. You can learn more about the Making Home Affordable program by visiting www.makinghomeaffordable.gov.
Well, that’s it for this edition. We welcome your feedback and ask for your thoughts and suggestions by e-mailing us at email@example.com. Thank you for watching. Until next time, I’m Thomas Fox for Cambridge Credit Counseling.