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Second Mortgage Elimination

16th February 2011

With the government continuing their politically correct stance of forcing banks to offer loan modifications to struggling homeowners, there has been very little talk about mortgage refinancing and lien stripping.  These are viable solutions to homeowners who want to eliminate their second mortgage.  While lenders are handing out 1st mortgage modifications like cup-cakes, many lenders are resistant to extend second mortgage modification programs because the re-default rate is so high.  The first recommendation for homeowners should be consolidating the first and second loans together.  FHA mortgage rates continue to be appealing below 5% and the fixed rate FHA programs are flexible with credit and equity.  For those that do not qualify for refinancing, second mortgage lien stripping has become an attractive alternative.

In a recent report, the Congressional Oversight Committee admitted the government’s HAMP loan modification program has failed to help enough homeowners to correct the housing crisis. The vast majority of loan modification requests fail, in part, experts believe, because banks have balked at offering a reduction in mortgage principal, the most effective way to halt costly foreclosures. Fannie Mae and Freddie Mac immediately proclaimed, however, that they remain opposed to making this option available to struggling homeowners. Protecting the interests of the banking industry over the consumer, the Federal Reserve also blocked new foreclosure regulations that would have reined in foreclosure abuses.

Although the economic collapse of 2008 has caused the tide to rush in on everyone, there has been no bailout for the “little guy.” Left to fend for themselves, increasing numbers of homeowners are turning to a little-known provision in the federal bankruptcy law, which permits the discharge of a second or even third mortgage in its entirety in a Chapter 13 bankruptcy. The American Bankruptcy Institute recently reported that Chapter 13 bankruptcies have risen by 9 percent in 2010 compared to last year.

Flying under the media radar, the right to discharge a second mortgage in a Chapter 13 bankruptcy provides a glimmer of hope to homeowners stuck with a foreclosure because they own a home they can’t afford and can’t sell. With one in 10 Americans out of work, while others have suffered a pay cut as a condition of keeping their jobs, the amount of disposable income available to pay a mortgage is not what it used to be. Getting rid of a 2nd mortgage payment can sometimes make the difference between keeping a home and losing it to a foreclosure. How then does a homeowner qualify? Quite simply, when a home is worth less than the balance of a first mortgage, federal bankruptcy law — at least in most states — permits a homeowner to treat a second mortgage like an unsecured credit card and discharge it in a Chapter 13 bankruptcy. Read the original Huffington Post article, written by Richard Gaudreau.

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The latest Home Affordable Modification Program statistics were announced Monday in a report used to measure the success of federal loan modification programs. The HAMP report indicated that slightly more than 10% of eligible borrowers received a loan modification that became permanent. Yet only one in three homeowners who started in the trial program has been kicked out.  The number of homeowners who have received a permanent federal loan modification rose to 340,459 in May from 295,348 reported in April.  That’s about 11% of 3.2 million HAMP eligible loans.  At the same time, the number of trial loan modification plans continued to fall as borrowers must now provide proof of income prior to any new payment plan. Active trial modifications fell to 467,672 from 637,353 in April. And borrowers who received a mortgage modification under the old rules are now required to prove their income before getting a permanent modification.  An additional 150,000 borrowers who could not prove their income or keep up with the new payments had their modifications canceled in May, bringing the total number of cancellations to 429,696. That’s about 35% of the 1.24 million trial modifications started.

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Thousands of borrowers are losing trial loan modification agreements that were installed recently under the HAMP prrogram. The total of distressed homeowners who drop out of President Obama’s loan modification plan soared in April.  According to federal loan modification statistics released last week, over 122,000 homeowners had their trial mortgage loan modification agreement canceled in April, bringing the total to 277,640 since the HAMP program began about a year ago.

Meanwhile, only 68,000 homeowners were converted from the trial modification phase to a permanent loan modification last month.  Under the program, known as HAMP, eligible troubled borrowers are put into trial home loan modifications to determine whether they can keep up with the reduced mortgage payments and to give loan servicers time to verify income and hardship.  A total of 295,348 people have received permanent long-term help under the loan modification plan, but another 3,744 who were converted to permanent status were later cut from the program anyway.  Mortgage refinancing has not been an option for millions of homeowners who have inadequate credit scores or mortgages that are buried under-water with home values less than the mortgage balance.

The latest modification report does not include home equity loan modification details.  Many industry insiders believe the second mortgage foreclosures and defaults could be stemmed if home equity servicers came up with a good modification plan for home equity credit and second mortgage loans.  Many homeowners have used the loan modification to stop the foreclosure proceedings.

In most cases, loan modification agreements are usually canceled if the borrower fails to make the adjusted payments, or if during the trial period, does not meet the program’s criteria or hand in the required income verification paperwork.  Obama admin officials said they were not surprised to see the number of canceled trial mortgage modifications rise because borrowers had been allowed to enroll in the trial program by simply stating their income. Many homeowners are being dropped from HAMP if they cannot prove the income figures they originally provided.  “As those decisions get made, it’s certainly expected that there would be some that fall out of HAMP,” said Phyllis Caldwell, chief of Treasury’s Homeownership Preservation Office.  So far, some 24.6% of trial loan modification options have become permanent, up from 19.8% a month ago.  Some 637,353 troubled borrowers remain in trial mortgage loan modifications, officials said. The pace of people entering the program has slowed as servicers begin implementing new requirements to collect documents at the outset. Read the original article at

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