Track the Stimulus

The Treasury introduced an addition to the housing plan, the homeowner affordability and stability plan (HASP - or making home affordable plan), to facilitate mortgage modifications by providing incentives to creditors and servicers to modify existing home equity loans or other second liens on the properties.  The government estimates that approximately 50% of all homeowners eligible for its mortgage modification program have second liens (1 to 1.5 million); by introducing incentives to modify those loans, the program is expected to help those homeowners reduce their payments even further, and to improve the chances that the mortgage modification program would work. 

Mortgage modifications under the Obama housing plan were proceeding at a slower than expected pace because creditors were unwilling to modify first mortgages unless the owners of home equity loans or second liens subordinated their loans to the new modified loan, and the latter have been slow in doing that and in many cases unwilling to do so.  Why is this important?  If a bank owns a first mortgage it has priority in the recovery value of a house that goes through bankruptcy; if the bank loosees this priority because of the modification, then the owner of the second lien gets to collect first in the eventuality of a bankruptcy, placing the first mortgage creditor at a clear disadvantage.  The second lien program is expected to help smooth out the process by making it automatic for services who participate to modify a second lien after the first mortgage has been modified.

Who qualifies for a home equity loan modification? 

• Homeowners who have a home equity loan or other second lien on their property and are also eligible to participate in the mortgage modification program.
  

What do homeowners who qualify get? 
In short people who qualify for a home equity loan modification get lower monthly payments:

• Interest rate is reduced to 1% for amortizing loans for a period of five years;
• Interest rate is reduced to 2% for interest-only loans for a period of five years;
  

incentive payments:

• $250 per year for every year they are current on their payments for a maximum of five years;

and in some cases an elimination of the second lien (the home equity loan).

Similar to the mortgage modification program this will be financed by the treasury and the lending institutions.

How does the home equity loan modification program work? 
When a mortgage is modified under the housing plan (HASP), servicers participating under the second lien program will automatically modify the second lien (home equity loan) according to the following rules:

For amortizing loans (those where the borrower pays equity and interest):

• The interest on the home equity loan is automatically reduced to 1% for the next five years;
• Extend the term of the modified second mortgage to match the term of the modified first mortgage, by amortizing the unpaid principal balance of the second lien over a term that matches the term of the modified first mortgage;
• Forbear principal in the same proportion as any principal forbearance on the first lien, with the option of extinguishing principal under the Extinguishment Schedule;
  
• After five years, the interest rate on the second lien will step up to the then current interest rate on the modified first mortgage, subject to the Interest Rate Cap on the first lien, set equal to the Freddie Mac Survey Rate; the second mortgage will re-amortize over the remaining term at the higher interest rate(s);
  

For interest-only loans (the borrower only pays interest on the loan):

• The interest rate is reduced to 2% for the next five years;
• Forbear principal in the same proportion as any principal forbearance on the first lien, with the option of extinguishing principal under the Extinguishment Schedule;
  
• After five years, the interest rate on the second lien will step up to the then current interest rate on the modified first mortgage, subject to the Interest Rate Cap on the first lien, set equal to the Freddie Mac Survey Rate;
  
• The second lien will amortize over the longer of the remaining term of the modified first lien or the originally scheduled amortization term, with amortization to begin at the time specified in the original contract.
  

Loan extinguishment:

• The government is providing an incentive for creditors to extinguish a second lien/home equity loan - the value of the incentive varies from 3 to 12 cents for every dollar of unpaid principal balance that is extinguished depending on whether the loan is current or past due, and the financial viability of the borrower. 
  

How does the Treasury support the home equity loan modification program? 

• Services will receive up to $1,250 for each successful second lien modification in incentives to modify these loans:
  
• $500 up-front when the home equity loan is successfully modified, and
  
• $250 per year for three years, if the borrower stays current;
  
• Borrowers that stay current on their mortgage after being modified will receive $250 per year for up to the five years to be applied against the principal on their first mortgage loan, to help them build equity;
• The Treasury (i.e. taxpayers) and the lender will share the cost of reducing monthly payments on the difference between the interest rate on the first mortgage as modified (or the lower between that and the current interest rate for interest only loans), and the 1-2% rate of the second lien .  The government will provide this incentive for up-to five years.  
  
• If the servicer chooses to extinguish the principal unpaid amount on the home equity loan, the Treasury will compensate the creditor by paying 3 cents for every dollar extinguished for loans that were 180 days or more overdue, and between 4 cents and 12 cents for those current or less than 180 days overdue.

Anything else? 

• As for the mortgage modification plan, financial stability plan recipients will have to follow the guidelines for loan modifications;
• Second lien modifications will not stop or slow first mortgage modifications.
  

NOTE: Just to be clear - we are NOT a government sponsored site, and we try to keep the information on the site accurate and up-to-date.  Nevertheless, there may be errors, and you should check the information on qualifications and other details for the plans with your mortgage agent.  For homeowners the government provides a simple self-assessment test at: http://www.makinghomeaffordable.gov.