Mortgage Loan-Modification Plan Revised for Home Equity Loan Relief

The new mortgage loan modification program looked to address a critical component in its efforts to stem the foreclosure crisis.  According to Credit Suisse Group nearly 50% of delinquent borrowers have a home equity loan. Many mortgage executives complained to the administration a few months ago because their $75 billion mortgage bailout program had no plans to re-work equity loans in 2^nd position.  Investors, who include pension funds, insurance companies and hedge funds, say that rewriting the first mortgage without touching the second violates their rights, because second mortgages are supposed to be repaid second. Critics also pointed out that Obama’s first plan had a conflict of interest, because many mortgage loans are serviced by big banks that also hold home equity loans.

Under the revised home equity loan relief plan, mortgage-servicing companies that participate in the loan modification program for second mortgage liens must automatically renegotiate the2nd mortgage when the 1st mortgage was reworked. The US government will share in the cost of reducing the interest rate on second mortgages for five years. As an alternative, it will pay holders of home equity loans to relieve their unpaid debt.

Mortgage-servicing companies that modify second mortgages will receive an upfront payment of $500 and additional payments of $250 a year for up to three years for successful modifications of home-equity loans and other second mortgages. Homeowners who do not fall delinquent on the modified equity loan would receive payments of $250 a year for up to five years that would be used to pay down the balance of their first mortgage. The revised plan also encourages the use of the federal Hope for Homeowners program, which allows borrowers to refinance into a more affordable, government-backed loan, provided the investor who holds the mortgage agrees to a principal write-down.