Second Loan Plan to Help Florida

Published by julia | Filed under Buyer / Seller Tips, Market Trends, Miscellaneous, Real Estate

The Obama administration’s move to help troubled homeowners modify second mortgages could have a broad reach in Florida, where foreclosure levels are some of the highest nationwide.

Under the new plan, the Treasury Department will offer cash incentives and subsidies to lenders who agree to substantially reduce the monthly payments on second mortgages or forgive those loans entirely. The program is aimed at plugging a hole in the original program, which targeted primary mortgages.

Millions of homebuyers took out second mortgages to buy houses with little or no down payment, or to finance home improvements and other purchases.

Foreclosures in Southwest Florida showed some easing during March, but few think that it will last. Manatee County saw a 57 percent drop compared with the previous month. Charlotte County saw a 19 percent decline while Sarasota County’s rate rose 14 percent..

Besides the dollars lost on any particular loan should the lender agree to a modification, accounting rules may force lenders to devalue their second mortgages by the same amount. For example, if a bank holds $10 million in second mortgages and agrees to accept 50 cents on the dollar for one of them, the bank may then have to devalue their entire second-mortgage portfolio by the same amount.

Analysts predict that at least 4 million homeowners will face foreclosure proceedings this year, up from about 2.2 million in 2008. Administration officials said about half of those people had second mortgages.

Under the new plan, mortgage lenders that sign up will agree to an automatic formula for sharply reducing payments on the second mortgage for any customers who have modified their first mortgage.

Under the original program, the Treasury offers cash incentives to lenders to reduce a borrower’s monthly payments to 38 percent of monthly income. The Treasury then shares half the cost of further reducing the payments to as low as 31 percent.

But both the earlier and latest programs have considerable limitations.  For example, the first-mortgage plan excludes people whose loans are more than 5 percent above their home’s current value. A borrower cannot take part in the latest program unless he or she is already part of the earlier program.

Under the new program, which officials said would not get under way for at least several weeks, participating mortgage lenders would agree in advance to automatically reduce the interest rates and possibly the outstanding loan amounts for a second mortgage as soon as the first mortgage had been modified.

To induce mortgage lenders to participate, the Treasury is offering lenders a $500 cash incentive for each second loan they modify and additional payments of $250 a year for three years if the borrower stays current. The Treasury will also share the lenders’ cost of reducing the monthly payments.