WASHINGTON — The Obama administration announced additional details Tuesday of its plan to encourage loan modifications, adding procedures to help modify second mortgages and force servicers to make better use of the Hope for Homeowners program.
Hope for Homeowners, which began operation Oct. 1, requires lenders and services to make principal writedowns to refinance loans into a government-guaranteed mortgage. But the plan has failed to draw wide interest from servicers.
Under the loan foreclosure plan, however, the Obama administration would require servicers to first offer Hope for Homeowners refinancing options to qualified borrowers.
That would effectively mean that servicers would have to first offer a principal writedown for some borrowers before using other parts of the Obama plan.
It is unclear if the new requirement will result in much more use of the Hope for Homeowners program, however. Industry participants say a refinancing using the plan is currently not feasible in many cases, though tweaks to it are traveling through Congress in legislation currently in the Senate.
"Servicers will be required to determine eligibility for a Hope for Homeowners refinancing" under the new rules, said Anne Canfield, the executive director of the Consumer Mortgage Coalition. "Where Hope for Homeowners proves to be viable, the servicer must offer this option to the borrower."
But she said the program would help more borrowers if the new legislation were passed. "In order for it to really work, some changes have to be made to it, so therefore I think this is an evolving story."
The legislative changes, which include requiring less of a haircut from lenders, are bound up in a bill that also includes new provisions for mortgage cramdowns in bankruptcy, which have slowed its progress considerably in the Senate.
Many of Tuesday's changes are designed to address second mortgages. Investors have complained that while holders of first mortgages are taking a loss as a result of a modification, second mortgages have been unchanged. Under the plan, the administration would require that second liens be modified at the same time as first mortgages. The new requirement "addresses the 800-pound gorilla in the room, which is the second liens," said Brian Chappelle, a partner at Potomac Partners. "Historically, traditional theory was that second-lien holders would take the hit before the first-lien holder. But that theory was turned on its head in this crisis."
The new provisions for modifications on second mortgages, Chappelle said, will allay those investor concerns.
The Treasury said 12 major mortgage servicers, whose business covers three-quarters of all mortgages in the United States, along with Fannie Mae and Freddie Mac, had signed contracts to participate in the foreclosure prevention plan. The plan requires them to modify some struggling borrowers' loans so that the borrowers' overall monthly debt-to-income ratio is brought down to 31%.
Under the plan, the servicer of the second mortgage would have to apply a "term-matching system" to modify the second mortgage according to the details of the first modification. Then, using money from the Troubled Asset Relief Program, the Treasury would further lower the interest rate on the second mortgage, matching a dollar-by-dollar reduction with the servicer until borrowers paid 1% to 2% interest on their second mortgages, depending on specific circumstances.
In some cases the Treasury would pay second-lien holders a few cents for every dollar to simply extinguish the second loan.
Officials said money for the incentives for modifications of second loans would come from the original $50 billion allocation of Tarp money the Obama administration announced when it unveiled the modification program in February.
Some were already praising the changes. "These critical actions will expand assistance to distressed homeowners in states such as California," said California State Assemblyman Ted Lieu, D-Torrance.