Homeowners who are facing foreclosure because of second mortgages on their homes received a piece of good news from the Obama Administration on Tuesday. Financial institutions will receive subsidies from the federal government out of the Troubled Assets Relief Program fund to modify the terms of second mortgages.
About half of all at-risk borrowers have second mortgages. The previous mortgage modification program paid lenders to reduce rates on primary mortgages, but did not address second mortgages. These second mortgages can make staying current on payments difficult, even when homeowners received assistance under the previous foreclosure alternative program. Lenders will receive $500 from the government to modify the second lien, as well as $250 a year for three years if the homeowner keeps up with the payments. The borrower could also receive $250 a year for five years if they manage to reduce the principal of the loan. For certain types of loans, borrowers could see their interest rates drop to as low as 1 percent, with the government shouldering some of the burden of the rate reduction.
The government is hoping to help homeowners, as well as appease investors in the companies that own the mortgages. Many investors felt that the government's policy of subsidizing loan modifications for primary mortgages was unfair to mortgage holders.
Bank of America, Wells Fargo, JPMorgan Chase and others have already agreed to join the program, and the government will encourage the rest of the industry to get on board as well.
With foreclosure rates still rising rapidly, however, it may be some time before distressed homeowners see any real relief.