The Obama administration released details on the second lien program which is the latest initiative under the Making Home Affordable Program. This is designed to facilitate and increase the success of the first lien modification program. There are two options for second lien holders:

1. Modification: Reduce mortgage rates for five years, after which the rate will step up to the then-current rate on the first lien. For amortizing mortgages, the rate will be reduced to 1% and for interest-only loans to 2%.

In both cases, the servicer will extend the term of the mortgage and forbear principal in the same proportion as the first lien. The Treasury will pay investors half of the difference between the modified interest rate on the first lien and the new rate on the second lien (1% or 2% depending on the loan).

2. Extinguishment: lenders will have the option to extinguish second liens in exchange for a lump-sum payment.

Similar to the HAMP (Home Affordable Modification Program) for first liens, there are monetary incentives to encourage participation. The Treasury will pay servicers $500 up-front and $250/yr for three years as long as the borrower remains current. Similarly, borrowers will receive success payments up to $250/yr for as many as five years. For participating servicers, the second lien will be automatically modified or extinguished after the first lien is modified.

Along with the announcement of the second lien program, the Treasury unveiled steps to include the Hope for Homeowner (H4H) program in HAMP. Servicers will be required to evaluate borrowers for H4H, and if eligible, must offer this option to the borrower. The Treasury is still working on improving the program, including pursuing legislation so the FHA could reduce fees paid by borrowers, permit borrowers with higher debt burdens to participate and increase flexibility for lenders.

These additions should help improve the effectiveness of the Obama administration’s housing policy. The Treasury has made it clear that it is committed to supporting the housing market, introducing programs to stem foreclosures and stimulate new housing demand. These programs go hand-in-hand with the slew of other policies introduced to stimulate overall growth and improve financial markets.