Risky Lending
Second mortgage liens have always been considered risky lending. Investors in second mortgages are about to find out that the risk was higher than anticipated.
WASHINGTON, April 6 (Reuters) – The U.S. Treasury will soon finalize details on a plan to extinguish and modify second-lien mortgages as part of its overall housing program, a senior Treasury official said on Monday.
The second liens — home equity loans that were often written in tandem with a primary mortgage during the housing boom years — have been an obstacle to refinancing and modifying loans to make them more affordable.
The official, speaking to reporters on condition of anonymity, said assistance would be provided and also guidelines that “comprise a clear path for the reduction of second lien debt.”
He said these range from extinguishing them to keeping them in place as a part of mortgage modifications done under a $75 billion program the Obama administration is implementing to make failing mortgages affordable to home owners.
Under the “old rules” obtaining a second mortgage was not easy. There were tough restrictions on loan to value levels and the borrower needed sterling credit. Investors are now discovering why the old rules made sense as they face total losses on second mortgages approved during the lending boom.
Mortgages Secured By Negative Equity
During the peak years of the housing boom it was common for second mortgage lenders to allow borrowing up to 100% of a home’s value. As housing prices cratered over the past three years, the collateral backing these high risk second mortgages was vaporized leaving lenders with an essentially unsecured note.
It has become somewhat of an open industry secret that second mortgage investors do not even bother trying to foreclose or collect since recovery would be minimal. The second mortgage lien remains on title, however, preventing homeowners from selling or refinancing unless they can come to a settlement with the second mortgage lender.
It now appears that most of the underwater second mortgage investors will be forced to recognize a 100% loss of investment based on legislative decree.
Many Losers, Some Winners
The end result of the second mortgage easy lending fiasco is a total loss for many second mortgage investors. Most of the companies that specialized in second mortgage lending are no longer in business. Many future applicants looking for a second mortgage loan will be out of luck as lenders abandon second mortgage lending.
Every disaster, however, seems to have some winners. Those homeowners who borrowed to the max and used second mortgage money for cars, furniture or exotic vacations and such are no doubt smiling at the prospect of having their debt extinguished.
…Second lien mortgages possibly being extinguished sounds real good to me. I have a primary 500k and secondary 100k helock(headlock) with Wamu/Chase. It was originally started with Wamu. It has been an option arm nightmare. Wamu gave me a modification last year 2008 which really was a joke since all they did was freeze it for 5 years at 6.5% interest only to avoid negative amortization. It will then revert to the libor rate at the end of the term unless I arrest it now and get a good deal . I am under water. What I would like to find out is will Wamu soon to become Chase be forced to forget the 2nd lien.(heloc)? That would help me alot. Wamu never did any modification on the Heloc. Maybe its payback time …. I might be able to do a legitamite low cost refi with another lender if things can be done to help people in these situations. How aggressive will the government be to get this done? It seems like the banks are side skipping every thing and are unwilling to really do whats right. You send them paper work and it seems never to be fully answered, They just keep you on hold and wait for you to give up and go away. Any help or insight ? Thx, Westchester ,N.Y.