Realty Check

CNBC.com Barack Obama

Yesterday the Treasury Department announced another element to the Home Affordable Modification Program (one part of the Making Home Affordable Program). It addresses what has been a big impediment to loan modifications so far, that is, second liens. Of the $12 trillion mortgage market, about $1 trillion are second liens (often called “piggyback loans”). According to the NY Times, 70 percent of those are held by banks.

The Treasury notes that 50 percent of at-risk mortgages have second liens, so under this new program, “when a Home Affordable Modification is initiated on a first lien, servicers participating in the Second Lien Program will automatically reduce payments on the associated second lien, according to a pre-set protocol.” Of course the servicers are also allowed to just “extinguish” the second lien “in return for a lump sum payment under a pre-set formula determined by Treasury.”

Once again, I understand the need for this second lien aspect of the program, and it really goes along with the first lien program, offering a $500 upfront cash incentive to servicers to modify the loan and $250 additionally each year for three years if the loan stays current. The government shares the cost of reducing the interest rate on the second lien to 1 percent and/or using the other mechanisms (like principal forbearance or extending the loan term) in conjunction with the first lien modification.

Here’s the part that bugs me: “Borrowers can receive success payments of up to $250 per year for as many as five years. These payments will be applied to pay down principal on the first mortgage, helping build the borrower’s equity in the home.”

I certainly understand why servicers get the incentives. It costs them money to modify these loans, and not just the loss in payments, but the paperwork and staff needed just to get to those payments. But why should borrowers receive a cash incentive from the government, i.e. me, to do what they are supposedly now able to do financially, and what they should have been doing in the first place. Why do they need an “incentive” to meet their obligations, once those obligations have been modified to meet their budgets? The incentive on the first lien, I suppose, could be rationalized as a much-needed home equity builder, but why do you need that on the second lien as well?

Second liens were taken out in droves during the housing boom; we referred to them as using your home like an ATM. People bought cars with the money, built fancy kitchens and put in swimming pools. They were great for fuelling the economy, but in my view, were used even more frivolously than some of the worst first lien subprime loans.

Adelaide writes in to the blog: "I am now paying not only for houses people did not pay for, I am now also paying for consumer non-durables. Call it a second mortgage if you like, but a VERY small percentage of people "pay for college" with a second mortgage. Just check the amount of college loans outstanding versus the number in college, and the math tells you that second mortgages just are NOT being used for anything but nonessential stuff.. PLEASE do an on-air piece about this! I have never been able to afford luxury items. I am furious that I am buying them for people who never should have bought them in the first place."

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