On April 28, 2009, Treasury announced updates to the Making Home Affordable Program.  As previously discussed, the Treasury’s Making Home Affordable Program, which is aimed at helping 7 to 9 million homeowners, consists of two programs: The Home Affordable Refinance Program and the Home Affordable Modification Program.  The newly announced updates address modifications to second mortgages where the first mortgage has been modified under the Home Affordable Modification Program.

The Making Home Affordable Program is a completely voluntary program.  However, mortgage holders and servicers that do sign up for the Program, should realize that they must modify any second mortgage for a homeowner whose first mortgage has been modified under the Program.   A mortgage holder cannot elect not to modify a second mortgage once it has entered the Program.  A list of participating institutions is available here.

A modification to a second mortgage will not delay a modification to the first mortgage — that is, a holder of a first mortgage cannot wait to modify that mortgage until the second mortgage modification is also in place.

The Program contains distinct modification requirements for amortizing second mortgages and for interest-only second mortgages.  Under either type of mortgage, the holder or servicer will receive incentive payments of half of the difference between the original interest rate and the modified interest rate, as well as pay-for-success incentives of $500 initially and $250 per year for three years for each modification, as long as the first mortgage remains current.

Amortizing Second Mortgages. Under the updated Program, an amortizing second mortgage’s interest rate must be reduced to 1%, and the term must be extended to match that of the first mortgage. Further, the holder or servicer must forebear principal in the same proportion as any principal forbearance on the first mortgage, with the option of extinguishing principal under the Extinguishment Schedule.  After five years, the interest rate will be reset to match that of the first mortgage, and the second mortgage will re-amortize over the remaining term at the higher interest rate.

Interest-Only Second Mortgages. Under the updated Program, an interest-only second mortgage’s interest rate must be reduced to 2%, and the holder or servicer must forebear principal in the same proportion as any principal forbearance on the first mortgage, with the option of extinguishing principal under the Extinguishment Schedule.  After five years, the interest rate will be reset to match that of the first mortgage, and the second mortgage will amortize over the longer of the remaining term of the first mortgage or the original amortization period.

Extinguishment Price Schedule. As an alternative to modifying a second mortgage, a lender or servicer may extinguish second liens in exchange for larger payments.  For second mortgages over 180 days past due, a holder or servicer will be paid three cents for each dollar of unpaid principal balance extinguished.  For second mortgages less than 180 days past due, a holder or servicer will be paid according to the following schedule:

Table: Extinguishment Price Schedule: Per Dollar of UPB in LTV Range

(Loans less than 180 days past due)

Second-Lien LTV Range

Back-End DTI

< 110

110 to 140

> 140

> 55%

0.09

0.06

0.04

< 55%

0.12

0.09

0.06