Second Mortgage Modification

Second mortgage modifications really came of age when the recession hit home hard in the United States in 2008. The purpose of these second mortgage modifications was to make the monthly payments more economic and manageable. The two metrics used, are to reduce the monthly interest rate and extend the mortgage loan period. Second mortgage modifications should not be confused with the more common refinance mortgage. The refinancing mortgage completely pays up the existing mortgage, establishes a new mortgage and needs to satisfy the lenders conditions in full.

The Obama administration is making homes affordable
The second mortgage modification is a US government initiative and has been designed to handle the crisis in the property market in the United States. The Obama administration has used this instrument to aim to release pressure on the US housing market. This new second mortgage modification plan allows home owners to have their first mortgages automatically modified and the resulting monthly payments decreased as well as any associated junior liens, assuming, of course, that the primary and secondary lien holders are included as a part of the program.

One of the most important factors in being sure that the “Making Home Affordable” scheme would work was that the largest lenders in the USA would buy into the program. The Obama administration worked hard and diligently to ensure that these lenders would be major stakeholders, ensuring the scheme worked. When the second mortgage modification scheme was unveiled it immediately received a major boost. The list of mortgage lenders standing beside the initiative was impressive. Bank of America, Citibank, Wells Fargo and Chase were all ready to step forward, as they subsequently did.

How does a homeowner qualify?
There are a series of requirements that a mortgage borrower needs to satisfy in order to qualify for a second mortgage modification. These can be listed as follows:

  • You will need to be an owner-occupier of the home you intend to use for the second mortgage to refinance. If you are thinking of using this facility for a second home, it is not an available option.
  • Your principal unpaid mortgage loan cannot be more than $729,750 in order to be applicable
  • Any mortgage issued after the 1st January 2009 is not eligible for second mortgage modification
  • If your mortgage monthly payment is 31% greater than your monthly income you can qualify for this type of loan modification, (taxes, home owner association dues and insurance will be taken into account).
  • Having a mortgage payment that you have no chance of paying, caused by a significant change of income, or an unavoidable increase in your monthly expenses, or becoming unemployed.

This rescue package is particularly useful as it is a double edged sword, it can allow you to decrease your monthly payments, whilst at the same time you can eliminate your junior homeowner mortgage commitments thanks to a one time gross payment from the federal government.

How the second mortgage modification works for all parties
If you are looking at a short sale, the lender will calculate that the mortgage is paid up once the actual sale price, excluding interest, has been paid by the borrower. The key metric here is that the delta between the sales price and the existing loan, whichever is greater, is considered an income for which the seller could be taxed. The best advice is for the seller to get professional guidance from a tax expert to be sure that the profits risk is reduced to a minimum.

The Obama administration program looks to cater for short sale programs as well as more traditional spreads. Lenders can benefit too because they can get a much as $1,000 payments back from the US Treasury by letting homeowners sell their homes for a value below the total cost of the loan. This is a form of one time settlement that allows the lenders to write off a toxic debt and still recuperate the best possible payback in these difficult circumstances.

Generally, second mortgage modifications have been welcomed, not only by homeowners, but by lenders too. The initiative has allowed many homeowners to get out of the debt deadlock with their lenders and at the same time allow lenders to walk away with their minimum repayment requirements satisfied.