Monday, April 6, 2009

Second Lien Roadblocks

Obama’s Making Home Affordable Plan has hit a significant speed bump for many borrowers who are depending on it to help them refinance. 

In a nutshell, many second lien holders aren’t playing nice.  They’re not readily agreeing to jump back in line behind a new first mortgage.  But why should they?

They want to get paid off.  They want to get better terms.  And they hold the trump card.

In the event of a refinance, those in second lien positions have to agree to go behind the new primary loan.  If they don’t, no bank will agree to write a new primary loan.

Second mortgages are inherently riskier than firsts.  If a house goes in foreclosure, the first lien holder calls the shots.  They’re going to auction or dispose of the property in a way that tries to get what they have in it.  They’re not too concerned about who else is in line.

What’s left gets dispersed to the second lien holder, and any one else holding a lien against the property, like a homeowners association that wasn’t getting its dues.

The greater risk, the less certainty they will get paid off in a worse case scenario, is the reason HELOCS and HELOANS typically carry higher interest rates than conventional mortgages.

And the equity loan companies have been getting hammered because people have been defaulting on them before they stop paying on their first loans. 

So they want to be taken care of, as well.

The Wall Street Journal is reporting today that this has caught the Administration by surprise.    If so, it betrays shocking incompetence in basic understanding of the mortgage business.  The bureaucrats are now scrambling to come up with a solution. 


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