Is this for real or just clever Big Box Bank PR?
1st and 2nd Loan Modifications have always been an option for homeowners in distress on a private direct level. Ever try to negotiate with your 2nd Loan or HELOC holder? They may offer you a very high fixed rate from your variable ARM or extend your amortization period (from 10 to 30 years for example) or offer a forbearance (no payment for a short time) but so far the offers we've seen have been temporary at best.
Until recently, 2nd Mortgages were not covered by the Home Affordable Mortgage Program. We have successfully re-negotiated 2nd liens in the course of modifying combined loans. It's not exactly a picnic. Even with the same servicer, it is common to have different investors between the 1st and 2nd mortgage. So you are appealing to two different parties to assist you. Two parties with very different risks and attitudes.
This new 2MP directive is good news. But how helpful will it be in practice?
The Directive to Modify 2nd Liens Was Issued in August 2009
Until January 2010, no banks had adopted this program leading many to think it was dead. Now Bank of America, Wells Fargo, Chase (others mooted) are participating: Of course, Banks interpret the official guidelines liberally as do the investors. The fact they are being PAID by Treasury (that means us, folks) is their incentive to modify your second mortgage.
Modifying 2nd liens is not something they are happy about. Far from it. Most 2nd lenders face doubtful odds of getting repaid in the case of short sale, foreclosure or bankruptcy. For many homeowners, the 2nd they offered you in 2006 was the 20% you need for your down payment or to pay off consumer debt. Considering many USA homes have dropped at least 20% in value since the 2008 plummet that second may be 'uncollectable', as in the case of foreclosure or short sale. If you walk, they can chase you (and they will). As it stands, 2nd lien holders face a significant write down or a 'go away offer' for pennies on their dollar to allow a transfer of title to a new owner. 2MP will set a specific amount they can expect to clear; which should--in theory--encourage cooperation rather than drag out the foreclosure or short sale agony for all concerned.
According to a local Bankruptcy Attorney "This is good news for some of my clients. In some Chapter 13 cases we are able to void the second mortgage if there is no equity in the home above the amount owed on the first."
The 2MP Directive reads:
"Under 2MP, when a borrower's first lien is modified under HAMP and the servicer of the second lien is a 2MP participant, that servicer must offer either to modify the borrower's second lien according to a defined protocol or to accept a lump sum payment from Treasury in exchange for full extinguishment of the second lien. The 2MP offer will be made in reliance on the financial information provided by the borrower in conjunction with the HAMP modification and without additional evaluation by the second lien servicer."
Notice the 2nd lien bank may be paid off in a 'lump sum payment from Treasury" to go away. The verbiage suggests the 2nd lien servicer is cut OUT of the conversation. This will be interesting in practice. The final document is still being edited so click this link http://www.hmpadmin.com/ and select 'Second Lien Modification Program' under the PROGRAMS dropdown menu.
Enter Principle Reductions: BIG NEWS!
http://www.housingwire.com/2010/03/24/bofa-to-reduce-principal-in-hamp-mortgage-modifications/
This much touted program will land June 2010. Bank of America is all over this one in the press. It applies to homeowners with 1st Mortgages that are more than 120% under water and over 60 days delinquent; add a host of other disclaimers on who qualifies. According to the news reports we've read, less than 2% of modified loans have involved principal reductions to date. This could change!
By the time June 2010 rolls around even more homes will be underwater in the Subprime/Alt-A/Pay Option arenas so watch how well they handle the inundation. Considering that Bank of America is also now servicing most of the failed bank Countrywide loans (one of the minds behind the Pay Option ARMs) they could be under water themselves. The terms for principal reductions are being bandied about. Expect a maximum of 30% of your loan value set aside in a bank note 'on hold' pending a market recovery over a five year term. Many caveats on this one --the ink is not yet dry on the new guidelines.
Who's Minding the Store?
Enter the white knight, the Comptroller of the Currency: (take a close look at the facial expressions in this photo): http://www.nytimes.com/2010/03/28/business/28dugan.html?8dpc
Is anyone really policing consumer complaints about the Big Box Banks? Harvard Professor, Elizabeth Warren, chair of the House oversight panel, has called the consumer protection agency the 'red headed stepchild' of about seven different Federal agencies. None of these agencies wish to take on this role due to the unpopularity of helping consumers over their minders. (BBB's run the Federal Reserve, by they way).
How (Will) 2MP Work?
At the first mention of the 2MP program, the financial press starting issuing their concerns those “silent” second liens pose extra risk to first lien bond holders in residential mortgage-backed securities (RMBS). This raises the question of whether there will be even less investment in US Bonds or Securities by foreign investors. (Translate: any investor). Predictably the one investor buying fixed equities right now are those who lost value in the stock market plunge last year: small private investors like you and your parents. Keep a close eye on the bond markets.
Bill Cara, noted trader and blogger on equity markets notes in today's Week in Review:
"The US government 20+year bonds (TLT –2.53% W/W) dropped from Monday’s close of 91.36 to a low of 88.37 on Thursday, closing at 88.95 on Friday. For those who don’t understand the notion of volatility, that was a 2-1/2 day plunge of –3.27% in Treasury bonds."
Meanwhile, House Financial Services Committee chairman Barney Frank (D-Mass.) urges Banks to "write down second mortgages." Mr. Frank chairs the very same House Committee that handed out our tax dollars to these very BBB's to stay afloat and pay themselves huge bonuses. Furthermore, the Banks whom Mr. Frank implores are the pals of many a congressional representative who accepted contributions to their campaigns from these BBB's. One mouth says they "should do this" while another official directive says "do this and we will pay you" and the Banks get to take credit for 'doing the right thing'....while being paid by us. Kinda funny if it wasn't so serious.
ARE Interest Rates headed UP?
Well ask yourself this: If you own a company being asked to take a haircut to 'do the right thing' -- would YOU raise the price of your goods or service somewhere else to fund this act of kindness?
It has been suggested by many Fed watchers than when the Feds pull out of the Mortgage Backed Securites market that interest rates will go up. So far the rise has been manageable...about 1/4 point higher for a conventional fixed rate over the previous period. It all depends on who else wants to buy them...China perhaps?
According to more recent reports, the Fed is concerned about hyperinflation and the potential of a 'double dip' in the market -- meaning they know they printed too much funny money. It seems the props are slowly being pulled back to see if markets and businesses can survive.
Speak up about your concerns: http://www.congress.org
4.12.2010 UPDATE: HAMP Guidelines updated today are sounding pretty progressive: To expand the use of principal write-downs an modification approach will include incentive payments for each dollar of principal write-down, earned on a 'pay for successs' basis.
Download this document: http://makinghomeaffordable.gov/docs/HAMP%20Improvements_Fact_%20Sheet_032510%20FINAL2.pdf
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