Treasury Sets Up Second Lien Solution

[Update 1 reflects the Treasury’s announcement.]  The Treasury Department plans to use $50bn in rescue funds to pay mortgage investors to go along with borrower modifications. Specifically, the Treasury aims to resolve the issue of second lien holders who must agree either to forgive debt or take a smaller financial return on modified loans held in investment, according to a joint press release Tuesday. “It will be a shared effort with lenders, investors, borrowers and the government to ease or extinguish second-lien mortgage payments,” an unnamed administration official told Reuters hours ahead of the announcement. Second liens — or second mortgages sometimes piggybacked on top of first mortgages for borrowers without 20% to put down — raise an issue for the investor. With inherently higher interest rates (and lower principal balances) than first mortgages, these types of loans must face substantial modification if the plan is to have the far-reaching effect touted by the Treasury. “The second lien holder, as is appropriate in the junior position, is taking more of a reduction in interest rate,” an anonymous source told Reuters. “The interest rate will go at least as low as the interest rate on the first and it will (fall) much further to get there.” The plan will allow for the adjustment of second liens automatically when a borrower’s first mortgage goes through the federal modification program. It aims to ease the process of borrowers seeking second liens like home equity loans for additional help, Tresaury said. The Treasury and US Department of Housing and Urban Development on Tuesday officially announced the program along with additional steps to incorporate the Federal Housing Administration’s Hope for Homeowners program into Making Home Affordable. Government-sponsored entities Fannie Mae and Freddie Mac plan to implement the initiative with $75bn the Obama Administration set aside for housing, sources told Bloomberg. Write to Diana Golobay at [email protected].