Dealing with the Second Mortgage First Could be the Key

For a great number of distressed homeowners, modifying the mortgage payment on their first mortgage alone may be pointless unless a reduction in their second mortgage also comes with it.   Many borrowers at the end of the housing boom purchased their homes using what is commonly referred to as a piggyback loan, obtaining both a first and second mortgage together, allowing them to buy the property either with no down payment or to by-pass the need for mortgage insurance (PMI).  Second mortgage liens are a major obstacle that must be dealt with in the loss mitigation process and the Treasury Department seems to recognize this and is attempting to address the problem by offering incentives for completing loan modifications which reduce the monthly payment or the principal balance on an existing second mortgage.  The Treasury Department’s Second Lien Modification Program or (2MP) is critical to the success of the Home Affordable Modification Program (HAMP).  

Under the 2MP program, lenders must agree to reduce the monthly payments on the second mortgage, including home equity lines of credit (HELOCs), in the course of modifying a first mortgage.  Knowing what concessions a second lien holder is able to make, is critical to the first lien holder in designing a long range loan modification solution that will work for the borrower.  When the 2MP program was initially launched, the focus was on the objective that many of these second liens be retired completely through a lump-sum payment to the lender with funds by Treasury.  With the addition of the HAFA program, which should be ready to roll by April 2010, and was designed by Treasury to facilitate the Short Sale and Deed-in-Lieu of Foreclosure process, the concept may be a work in progress impacting both programs because each program begins by dealing with the second lien holder first.   

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