Needed Updates In The Obama Plan Will Now Include Second Mortgages

By Author: Nick Adama
Total Articles: 197
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One of the many downfalls for the home owner when seeking help from the Obama plan is a second mortgage. The plan did not inspire holders of these home equity loans and 100% second liens (where a second loan was granted with the first to allow a 100 percent loan without mortgage insurance) to participate in a loan modification.

For instance, if the buyer purchased a home for $200,000, the lender would give a first loan for $175,000 and another second loan for $25,000. This second $25,000 loan can be made by the same lender or another company all together.

If the first lender modified the loan under the Presidents plan, it could not impact the second loan. Many times the plan would get turned down without the cooperation of the second lender.

In an attempt to deal with this, the new plan gives lenders of second mortgages a financial incentive to cooperate. It also helps the reduction of payments by the second lender in some cases.

But what happens when this plan is applied to real life? Remember, the people devising these plans have very little first hand experience.

First, ...
... the lenders of second loans must still agree to be involved. So far 11 lenders have conceptually agreed to participate in the first edition of the bailout plan. Who knows how many will participate in this new version. These 11 lenders, however, constitute a substantial percentage of the first loans made. Seconds will likely be different as they are less and they know that the holder of the first mortgage is more prone to modify as it has more to lose should the home be foreclosed on.

Second, the holder of the second mortgage must first accept changing the loan to match the term of the first. A lot of these loans, and especially home equity loans, are shorter than the first, normally 5 to 20 years. This forces the lenders to change their normal term by extending them to the usual 30 years. Then they must amend the rate to the same as the modified first mortgage. Only after they've completed this, will the government subsidize the further lowering of the payment to as low as 1 percent for amortizing loans and 2 percent for interest only loans.

Like the first mortgage program, the modified loan is for five years at the lower rate and then converts to the prime rate at that time. With all of the government spending and "printing of new money" the value of the dollar will most likely do a nose dive and interest rates may go up as high as ten percent, in our opinion. The payment goes up one percent per year until it hits that new interest rate.

Is this really what the borrower wants?

This arrangement places quite a burden on the holder of the second mortgage. Will this plan work any better than the first? No one knows. How will the holders of the first and second "balance the pain" of payment reductions? In our opinion, the chances of two completely different servicers, or holders working together is nearly impossible. Especially when it looks like the second will have to take a loss.

Just like the first rendition of the Obama plan, this may create a black hole where the untrained staffs of the servicers will just be confused and will never successfully modify a mortgage.

There goes the easy government solution for saving your home!

As usual, the government hasn't really thought things out well enough to provide the help they promised, but hopefully a few more homes will be saved with these changes. But it's important for homeowners to have a strong back up plan, rather than relying on a government plan.
Nick publishes articles on the ForeclosureFish website, which attempts to teach homeowners how they can stop foreclosure on their properties while they still have time. The site describes various methods to hold onto a home, including foreclosure refinancing, deed in lieu, mortgage modification, filing bankruptcy, and others. Visit the site today to read more and find out what solutions you can use to prevent losing your home: http://www.foreclosurefish.com/