Enhancements to the Making Home Affordable (“MHA”) plan announced in late April were made, at least in part, because of complications second mortgages presented banks when attempting to modify or refinance a first mortgage. The new provisions, along with the integration of the Hope for Homeowners program, will assist even underwater borrowers by requiring write downs in order to increase homeowner equity, or at least subdue the urge to simply walk away.

Details of the Making Home Affordable Program Update spell out what can be done for amortizing loans as well as interest-only loans.

Amortizing Loans: (Loans on which borrowers make principal as well as interest payments)  Participating servicers are required to take specific steps when modifying amortizing liens in the second position.

1) Interest rate reduction down to 1 %,

2) Extension of the term to that of the modified first mortgage,

3) Principal forbearance on the first lien, with the option of extinguishing principal under what the MHA plan calls the Extingueshment Schedule.

Of course there is a catch, there is always a catch,

4) After five years, the interest rate on the lien in the second position will adjust to the current interest rate on the first mortgage,

5) The lien in the second position will then re-amortize over the remaining term at the higher interest rate, and

6) Investors receive an incentive payment from the U.S. Treasury equal to one half of the difference between the 1% interest rate floor and the modified interest rate on the first lien.

Interest-Only Loans: (Loans on which borrowers make only interest payments) In the case of an interest only loan, servicers are to

1) Reduce the interest rate down to 2%,

2) Forbear principal in the same proportion as forbearance on the first lien,

3) Extinguish principal under the Extinguishment Schedule, if any,

4) After five years the interest rate steps up to the interest rate on the modified first mortgage,

5) The lien in the second position amortizes either over the remaining term of the modified first loan or the originally scheduled amortization term, which ever is longer, and amortization begins at the time specified in the original contract,

6) Investors receive an incentive payment from the U.S. Treasury equal to one half of the difference between the 2% interest rate floor and the modified interest rate on the first lien.

There are also a pay-for-success structure for the second lien program similar to the first lien modification program.  Servicers can be paid $500 up-front for a successful modification and borrowers can receive up to $250 per year for as many as 5 years.  Payments made to the borrower are applied to the principal due on the first mortgage.

To give an incentive to lenders for extinguishing a second mortgage the MHA second lien program provides for an Extinguishment Price Schedule. The Extinguishment Schedule ranges from $.04 to $.12 for every dollar of debt extinguished for loans that are less than 180 days past due at the time of modification.  For loans more than 180 days past due at the time of modification there is no schedule and the lender/investor is paid $.03 for every dollar of debt extinguished.

Thus far the Obama Administration’s solution has been one of financial bargaining with banks, servicers and investors.  The money that borrowers receive in these plans amount to a reduction in loan principle, which is only another payment to the bank.

Time will tell if these changes are effective or whether the borrowers eventually end up in bankruptcy or foreclosure.  Not to mention having the banks and GSEs converting to property managers! For anyone who owns an investment property and can attest to what a headache it is, maybe there will be some sort of justice after all?