President Obama made more mortgage news as he announced further expansion of the federal loan modification program, Home Affordable Modification Program also known as HAMP.  Many Washington insiders are questioning the rumored bailouts to mortgage lenders and banks contained in the fine print of the HAMP program.

According to the Wall Street Journal, several of the largest mortgage lenders, including some that have already received huge bailouts, carry hundreds of billions worth of home equity loans on their books. As home prices have nationally declined by almost 30%, these second mortgage liens are worthless in the case of a foreclosure. Second mortgage loans are usually wiped out completely during a foreclosure if the price has decreased more than 20%.

Yet the Obama solution is now to pay off 6 cents on the dollar for those junior liens, also known as second mortgages. While 6 cents doesn’t sound like a lot, it is a whole lot more than zero, which is what the banks would receive otherwise. Given that the largest mortgage lenders are carrying over $500 billion in second mortgages that may need to be written down, we are talking about tens of billions of taxpayer dollars again being funneled to the very banks behind the subprime mortgage crisis.  If that bailout isn’t enough, the new equity loan plan increases payments to home loan lenders to not take over homes, all at the expense of the taxpayer.  Many critics believe that Obama continues these mortgage bailouts rather than correcting the financing problems in the housing market.