Real Estate & Mortgage Insights

New Incentives for Lenders to Modify Loans

At the beginning of March, President Obama and his team unveiled the details of his $75 billion Homeowner Affordability and Stability Plan, designed to help roughly 9 million struggling homeowners hold on to their houses. The plan will utilize two basic strategies to accomplish its goal: first, help mortgage borrowers refinance their risky, expensive loans into more affordable one, and second to encourage lenders with monetary incentives to perform more mortgage modifications.

Apparently, there have been plenty of takers on the homeowner side of things, but not as many lenders willing to participate, the Obama Administration recently announced fresh incentives to get more lenders motivated to participate in the program.

Any mortgage servicers that decide to sign on will now receive $500 up front for modifying second mortgages and $250 per year for the next three years if the refinance was successful. Second mortgages, like home equity loans, have been targeted specifically because roughly 50 percent of mortgages on the brink of failure have these second liens. According to the Administration, funding for this new incentive program will come from the available $50 billion Troubled Asset Relief Program (TARP) reserves set aside for mortgage recovery efforts.

While major lenders like Bank of American, Wells Fargo, and JPMorgan Chase have already thrown their support behind the Obama plan, many others have been skeptical in the past as their investors balked at former provisions of the program. They were against the modifications of only first mortgages, leaving many homeowners with risky and expensive second mortgages that might continue to jeopardize the success of the first loan modification. Investors also worried that major banks holding those second liens would not be motivated to refinance them because borrowers would be more likely to keep up with their seconds after the first loans become more affordable.

The new incentives address this issue and require all who sign one to modify all second mortgages after the first has been modified. This means stretching out the second home loan term and decreasing the interest rate to the level of the first mortgage. The government will then help subsidize the lenders' costs for bring the interest rate down to 1 percent on most fixed and adjustable rate mortgages, and 2 percent for interest-only loans.

Help for the previous administration's Hope for Homeowners plan is also included in the new incentives. Participation to this point has been minimal, but the government hopes that more will join up with program now that it will be embraced under the Obama team's blanket of affordability measures.

Hope for Homeowners scared many lenders away because it required strict borrower qualification standards and did not allow for second lien issues. Now the program will provide lenders with a $2,500 up-front payment for helping borrowers refinance. And lenders originating the new loans will be encouraged with $1,000 a year for three years, as long as the borrower remains on top of the payments.

Will these incentives be enough to coerce more major lenders into the mortgage modification playing field. That remains to be seen, but obviously the government believes it has provided the proper enticements to get them involved in serious foreclosure prevention efforts.

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