President Obama is currently in the process of expanding his $50 billion package to assist homeowners who are considering a short sale or facing mortgage foreclosure due to money problems. Whilst no extra money is to be allocated, the plan will incorporate this 'forgotten' group. Given the volume of affected homeowners, the Obama administration wishes to get this plan into action within the next few weeks.
The Original Proposal Failed Second Mortgage Holders
Obama's original plan only assisted homeowners facing mortgage foreclosure on a primary mortgage. However, according to Edmund L Andrews of the New York Times: "Half of those facing mortgage foreclosure have a second mortgage". Treasury officials realise that unless this 'forgotten' group is helped, the Homeowner Affordability and Stability Plan will fail. This group are vastly more likely to be struggling with negative equity.
How the New Plan Helps Homeowners Facing Mortgage Foreclosure or a Short Sale
Repayment mortgages:
All participating lenders will agree to reduce interest payments to just 1 per cent on any second mortgage where BOTH interest and capital are being repaid. This could reduce house payments by hundreds of dollars each month.
- A homeowner that was paying $1,629.72 on a 6% fixed-rate $250,000 loan over 25 years could find that they are now making house payments of just $945.97.
Interest-only mortgages:
Homeowners with an interest-only loan will have their borrowing rate capped at just 2 per cent. Some borrowers may choose to switch from a repayment to an interest-only mortgage until their money problems are alleviated. If a lender agreed to write-off some of the debt in relation to a primary mortgage, they will also be expected to offer the same relief on a second mortgage.
- A homeowner that was paying $1,250 on a 6% fixed-rate $250,000 loan over 25 years could find that they are now making house payments of just $416.67.
Treasury Incentives for Mortgage Lenders
In order to encourage participation in President Obama's second mortgage plan, lenders are to be offered $500 for each qualifying loan. They will also receive a further payment of $250 a year if a borrower maintains their house payments and avoids a short sale or mortgage repossession. It is also believed that the Treasury will share some of the cost associated with the new lower monthly repayments.
These changes will mean that homeowners who took out second mortgages may be eligible for both mortgage debt relief and/or low house payments due to lower interest payments. Those currently facing mortgage foreclosure or considering a short sale may be able to receive assistance with their money problems.
Source
Andrews, Edmund L. (2009, April 28). A New Plan to Help Modify Second Mortgages. The New York Times.
Disclaimer: This article in no way attempts to give legal or tax advice. One should consult a licensed attorney, tax advisor, or other qualified professional.
Asa Ghaffar - Asa has over 10 years of practical experience in loan approval, secured lending, bad credit repair, stock trading and debt management.
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