Yesterday, the Treasury Department announced two significant changes to the Making Home Affordable Program (“MHA”). The new changes include: (i) the Second Lien Program and (ii) the integration of the Hope for Homeowners Program (“H4H Program”) into the MHA. In the Fact Sheet accompanying its announcement, Treasury estimated that up to 50 percent of at-risk mortgages currently have second liens. Treasury estimates that allowing homeowners to lower payments on their second lien mortgages could potentially assist over 1 million homeowners and improve the effectiveness of the first lien modification program. Treasury also released two case studies to illustrate how the second lien program might apply.
In the press release announcing the programs, Treasury Secretary Timothy Geithner stated, “With these latest program details, we’re offering even more opportunities for borrowers to make their homes more affordable under the Administration’s housing plan. Ensuring that responsible homeowners can afford to stay in their homes is critical to stabilizing the housing market, which is in turn critical to stabilizing our financial system overall. Every step we take forward is done with that imperative in mind.” Echoing Secretary Geithner’s sentiments, HUD Secretary Shaun Donovan commented, “[t]oday's announcements will make it easier for borrowers to modify or refinance their loans under FHA's Hope for Homeowners program. We encourage Congress to enact the necessary legislative changes to make the Hope for Homeowners program an integral part of the Making Home Affordable Program.”
The Second Lien Program is expected to assist homeowners at risk of foreclosure by helping to create sustainable mortgage payments for homeowners who qualify for a first mortgage modification. The Second Lien Program would require participating servicers to forebear principal in the same proportion as any principal forbearance on the first lien, with the option of extinguishing the principal altogether. For fully amortized loans, Treasury will share the cost of reducing the interest rate on the second mortgage to 1 percent and servicers would be required to match the term of the modified first mortgage. On interest only loans, lenders would have to reduce the rate to 2 percent. After five years, the interest rate on the second mortgage would rise to equal the rate on the modified first lien mortgage.
This program has similar payment incentives as the first lien modification program. Servicers would receive $500 in upfront payments for successful modifications and $250 per year for a maximum of three years provided that the first lien remains current. Borrowers making on time payments would also receive “success payments” of up to $250 per year for up to five years to go towards the principal balance on the first mortgage.
The Administration is also offering incentives to lenders for extinguishing second mortgages. If a homeowner is 180 days late on their mortgage payment, Treasury will pay lender and investors three cents for every dollar of the loan value extinguished.
The H4H, which was authorized under the Economic Housing Recovery Act of 2008, and amended by EESA, began on October 1, 2009, and runs through September 30, 2011. Originally expected to assist 400,000 homeowners at risk of foreclosure, H4H has, to date, been largely deemed a failure. The improvements made to this program are expected to specifically benefit underwater borrowers by helping to increase home equity by requiring principal write downs. Loan servicers would be required to evaluate whether or not a borrower qualifies for a H4H refinance and offer to refinance for qualified borrowers. If the servicer determines upon initial consultation that the borrower qualifies for refinancing, the servicer must extend the option to refinance at the same time the borrower is offered a trial loan modification. In return, servicers and lenders are eligible to receive up to $2,500 in up front incentive payments for successful refinancing and lenders who originate H4H refinanced loans are eligible for $1,000 per year for up to three years, as long as the refinanced loan remains current.