New Fed plan will help with 2nd mortgages, home equity loans

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The Obama administration has announced a new program to help borrowers with second mortgages stay out of foreclosure. Under this program, the government will pay mortgage servicers $500 upfront and $250 a year for three years if they successfully modify a second mortgage, such as a home equity loan.

The Treasury Department says second mortgages are a major problem for at risk and foreclosed properties. These mortgages have created significant challenges for borrowers avoid foreclosure. This is because borrowers trying to get their primary mortgage modified also need the permission of the company holding the second mortgage. According to the AP:

The administration initiative, funded out of $50 billion in financial rescue money, relies on a series of payments to mortgage companies as an incentive to modify second loans at lower interest rates. Mortgage companies would get $500 upfront for each modified loan, plus $250 a year for three years as long as the borrower doesn’t default.

Under the new plan:

Lenders will get $500 upfront for each modified loan, plus $250 a year for three years as long as the borrower doesn’t default.
Borrowers could get up to $1,000 applied to the principal balance of their primary mortgage over five years. , The government would pick up part of investors’ costs as well.
Lenders would be given the ability to remove second mortgages entirely in exchange for larger government payouts.

A senior administration official told Reuters:

“The second lien holder, as is appropriate in the junior position, is taking more of a reduction in interest rate,” one official said. “The interest rate will go at least as low as the interest rate on the first and it will (fall) much further to get there.”