Second Liens Forgiven: Are You Kidding Me?

Amid the dozens of pages of details of the Obama mortgage modification plan, one new element will likely not make it into the headlines because it’s something of an afterthought.

It has to do with second liens, that is piggy back loans or home equity lines of credit.

Deep deep in the pages of the plan, is paragraph vi. Second Liens: While eligibly loan modifications will not require any participation by second lien holders, the program will include additional incentives to extinguish second liens on loans modified under the program in order to reduce the overall indebtedness of the borrower and improve loan performance. Servicers will be eligible to receive compensation when they contact second lien holders and extinguish valid junior liens. Servicers will be reimbursed for the release according to the specified schedule, and will also receive an extra $250 for obtaining a release of a valid second lien.

So in an effort to help borrowers stay current on their newly modified loan, which is at a nice new 31% debt to income ratio, the government is also going to pay cash money to get servicers to totally wipe out second liens. When I heard this I thought there might have been something funky in my morning muffin.

It’s not that I don’t get the reasoning. Sure, do all you can to help people pay their mortgage, like get rid of other debt. By why stop there? What about car loans? Student loans?? The second liens, in general, were used by borrowers to either buy more home than they could really afford or to use their homes as ATM machines. Yes, some people use home equity lines of credit to pay college tuition.

But I can’t tell you how many homeowners I’ve interviewed (and just take a look at David Faber’s documentary House of Cards to see more) who took out home equity lines to put in a pool or buy a fancy car or put an addition on the house that includes a fancy new kitchen with a Viking six-burner. And I’m supposed to pay for all that?

It’s one thing to suck up the bitter pill in order to save the greater housing market and keep families in their homes, but using taxpayer dollars to give homeowners a free ride on second liens is preposterous. The Obama administration talks a good long line about helping “responsible borrowers.” Second liens can certainly be responsible, but there’s a much much much greyer area in these loans when it comes to actual “need”, and many many people used them irresponsibly.

In fact, if Americans hadn’t taken quite so much money out of their homes during the housing boom, we wouldn’t be in quite the underwater mess we’re in right now.

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