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New guidelines for its foreclosure prevention program were issued by the Obama administration to address the issue of dealing with borrowers who have other second mortgages and home equity loans. According to the Credit Suisse Group, about 50% of those borrowers have a second mortgage. When the $75 billion program was laid out by the Obama administration, it drew flak from those who have invested in the mortgage backed securities because the plan did not have anything for the second mortgages.
These investors include insurance companies, hedge and pension funds. They argue that the stipulation of rewriting the first loan without addressing the second mortgage is against their rights, because the second mortgages would be repaid second. The plan also created an interest conflict, because the banks servicing the loans also hold second mortgages that will affect how they'll handle the loans.
There is a Way Out As per the revised plan, the mortgage servicing companies participating in loan modification would be automatically reworking the second mortgage when they deal with the first mortgage. The government would be sharing the interest reduction cost over these mortgages for five years or will offer to pay the holders of these debts to help remove these debts. An upfront payment of $500 as well as subsequent payments of $250 per year will be given to the mortgage servicing companies successfully modifying the second mortgages. The borrowers who remain current on the modified loans would get $250 per year for five years to help them with the payments of their first mortgage.
The government will also encourage the use of its program "Hope for Homeowners". It allows borrowers to refinance to a government backed loan if the investor holding the mortgage agrees to a principal write-down. The second mortgages became popular during the housing boom when the home equity loans of as much as 100% of the home purchase price was taken by the home owners. Government officials estimate that about 1.5 million homeowners would be helped by the government move to address the second mortgages. The officials believe the move would reduce the monthly installments for the US homeowners thus helping them in staying in their homes.
About 75% of the mortgages are serviced by 12 mortgage servicers, all of whom have agreed to participate in the government's first mortgage program. Many of them intend to support the second lien program as well. It is believed that the needs of all the stakeholders are balanced in the new guidelines proposed by the government.