Second Lien Issues Remain with Mortgage Modification Program: Amherst
Although the Home Affordable Foreclosure Alternatives (HAFA) program launched this week, a much longer-anticipated mortgage aid program, the Second Lien Modification Program (2MP) is yet to get off the ground. Late in March, Citigroup (C) became the fourth big lender to sign up. Bank of America (BAC) first signed on in January. Details of 2MP released recently by the US Treasury Department disappointed first lien investors, in part because the program requires the borrower's consent, according to analyst commentary from Amherst Securities Group. An automatic enrollment in the second lien program when the trial modification on the first mortgage begins would increase the success rate on both. "[W]e strongly recommend that the second lien be modified (or placed in a trial modification) automatically, with the borrower simply informed that the modification has occurred," Amherst analysts wrote in commentary this week. "The second lien modification would become 'official' at the same time the first lien modification is made permanent, and incentive payments could begin on that date." Laurie Goodman, who heads up the mortgage-backed strategy group at Amherst, noted 2MP will likely take a "decent period of time" to be fully implemented. The second mortgage will be modified later in the Home Affordable Modification (HAMP) than is "optimal" from a public policy perspective, she added. "From a public policy perspective, ideally the 2MP program would begin the same day the first lien trial begins," Amherst writes. "Doing so would lower the back-end [debt-to-income] of the borrowers, making a successful modification more likely. But in fact, the 2MP modification will begin much later—as long as 120 days after the servicer is notified. It is not clear to us why such a long time frame is necessary." It is also unclear what happens to the second liens when principal is forgiven on the first lien under the new, alternative waterfall, according to the Amherst team. Goodman writes that initial guidance from the Treasury seems to indicate that, if principal is reduced on the first lien, then the second would be reduced by at least the same proportion. But language urging the "extinguishment" of second liens carries the effect of principal forgiveness, rather than forbearance. And Goodman writes that "it is unlikely" the Treasury has decided whether 2MP will implement proportional or complete forgiveness. Write to Diana Golobay. Disclosure: the author holds no relevant investment position.