Can a second Mortgage be RefinancedIs it possible to refinance a second mortgage?
The plan, as mentioned above, aims to achieve three main objectives: Reduce mortgage interest by increasing trust in government-sponsored enterprises ("GSEs"), Fannie Mae and Freddie Mac.
Obama administration's recent notification of 28 April 2009 provides guidance on the amendment of second liens in cases where the first pledge has been amended and is designed to stimulate service providers and creditors to ease the refinancing of bad debt into new credit under the HOPE programme.
Ministry of Finance will split the cost of these second changes of pledge with depositors and will also make a prepayment to any depositor willing to redeem the capital for a second pledge according to a predetermined equation. Service providers and borrowers shall also earn performance awards for changes in the second pledge in a similar manner to those already provided for in the amendment of the first pledge under the plan.
Lastly, service providers and creditors also earn a performance fee in advance for all loans refinanced under the HOPE programme. Below please refer to Section II(D) of this call for proposals for detailed information on the setting up of the SLP and to Section II(E)(iv) for detailed information on the integration of the HOPE programme. As initially stated under the plan, the administration is trying to fund the mortgage loans of up to 4 to 5 million people.
" Those owners of homes are those eligible borrower with compliant credit that are currently held or guarantied by Fannie Mae and Freddie Mac and that are up to date with their mortgage payment but have a Loan-to-Value Relationship ("LTV") of more than 80%. Because of the devaluation of residential property assets, these borrower are not qualified for most public and commercial refinancing programmes as their total value of assets was more than 80%.
As part of the plan, Fannie Mae and Freddie Mac will allow the refinancing of these credits which they keep in their portfolio or which they have placed in mortgage-backed bonds. Those conscientious home-owners will have the chance to obtain refinancing at today's low interest rate, which is generally lower than what the borrower was eligible for in recent years when their mortgage was granted.
Funding would be provided for credits where the new first mortgage, inclusive of funding cost, does not exeed 105% of the fair value of the real estate. Please be aware that a borrower with two rights of lien on the real estate will continue to be considered for the Funding Programme as long as the amount due on the first mortgage is less than 105% of the value of the real estate.
If there are two pledges, the borrower's entitlement to the Programme depends in part on the second pledgee consenting to behave subordinately and to stay in the second pledge item. Fair value of the real estate is calculated after the debtor has applied for refinancing. In order to be eligible, each creditor must demonstrate a satisfactory level of earnings to make the new refinancing repayment and evidence of an adequate mortgage repayment record with its present creditor.
The guidelines describe in detail the application of the credit amendment programme (the "Programme") for "homeowners with increased risk". "Owners of risks are those borrower in owner-occupied houses with compliant credit that have a high aggregate mortgage liability or are "underwater" relative to incomes. "As the plan was initially notified, only the first mortgage dated on or before 1 January 2009 was considered for credit amendment.
However, the guidelines included incentive measures (up to $1,500 in cash) to discourage staff from removing second mortgage or other lien on the amended credit. The Obama administration, however, released new detail on April 28, 2009, which included changes to second pledges under the plan. Besides those already in arrears, the plan also covers those currently in receipt of payment but threatened with impending defaults.
In addition, a borrower with a high overall indebtedness (i.e. not only residential debts, but also auto credits, corporate debit cards, etc.) of 55 per cent or more of his earnings may still be eligible for the plan, but must join an advisory programme authorised by the Ministry of Housing and Urban Development ("HUD") as a precondition for the change of mortgage.
Advantages for plan participants included the provisional deferment of enforcement measures for the first three month of the plan and the lack of a minimal or maximal LTV value for plan participate. Nevertheless, the loan may only be changed once as part of the plan. Entitlement to participate in the programme shall expire on 31 December 2012.
There will be five main elements to the plan, as described below. US Treasury will work with banks and private equity firms to lower homeowners' mortgage repayments to an acceptable rate of 31% of the front-end to debt-to-income ("DTI") relationship. According to the guidelines, creditors must first lower interest rate on mortgage loans to 38% of the front-end DMTI.
Creditors are obliged to maintain the amended payment for five years to guarantee long-term affordable conditions. At the end of five years, payment may rise 1% per annum until the adjusted interest rates are lower than the fully-indexed contract or Freddie Mac Primary Mortgage Market Survey rates for 30-year compliant bonds.
However, if the lowering of the interest rates to 2% is not sufficient to raise the front-end GTI to 31%, the creditor must prolong the duration of the credit up to 40 years from the date of the change (if an increase in the duration is not allowed, the amortisation time must be extended).
When the interest cut and the maturity prolongation do not reach the 31% DTI objective, the creditor must forgo the capital. It is important that the plan also allows, but does not prescribe, creditors to reduce periodic payment to these DTI objectives by making major cuts (i.e. major forgiveness). Part of the cost of this capital decrease will be covered by the plan up to the amount the creditor would have obtained for an interest cut.
These amendments are based on the lenders' finding that the change under the programme is less expensive than the foreclosure of the credit. Every creditor is obliged to perform a present value test ("NPV") on the borrowings, which measures the present value of the estimated future cash flow from a change in the borrowing against the present value of the estimated future future cash flow without changing the borrowing.
When the NPV with the change is greater, the borrower must change the borrower's credit. When the present value is higher without the change, the creditor is not required to join the plan but to look for other alternative ways to prevent foreclosures, involving securitisation of foreclosures or shortterm selling programmes. Under the plan, US$1,500 will be prepaid to lenders/investors and US$500 to service providers for each qualifying change that complies with the guidelines.
Service employees also get "Pay for Success" charges, which are paid each month as long as the borrowers on the credit remain up to date and on track. In order to be eligible for the "Pay for Success" fee, the change must pass a de minimis test in which the changed form of the revised month's FITIA fee will be decreased by 6% or more of the pre-modified month's FITIA fee.
Under the plan, an additional $1,500 in incentives is paid to mortgage creditors and $500 to service personnel for credit changes made in cases where the debtor is currently making disbursements but is at immediate risk of defaults. As the administration considers that it is important to help vulnerable house owners before the impending failure, the administration wishes to encourage changes in these cases.
It also provides an additional stimulus to beneficiaries to keep abreast of the modification of the mortgage by granting a recurring repayment on the borrower's account which is directly reflected in the repayment of the capital account surplus of the modification (the "Pay for Performances success payment"). Provided the Mortgagor keeps abreast of his disbursements, the Mortgagor may obtain up to $1,000 annually for five years.
In order to qualifiy for the "Performance Payment", the change must pass a de minimis test in which the changed form of the revised periodic rate of compensation is 6% or more of the pre-modified periodic rate of compensation. Borrower are also entitled to a $1,500 transfer charge to effect uncovered and foreclosed sale if they are not considered for credit amendment under the plan.
Together with the Federal Deposit Protection Agency (FDIC), the administration has set up a subguarantee programme. Under the plan, the Ministry of Finance will set up an $10 billion auto mutual funds scheme. Insurances are conceived to prevent creditors from choosing to enforce mortgage loans that may be sustainable in the present, fearing that house values will continue to drop in the near term.
Under the plan, holders of altered mortgages would be provided with an extra benefit for each altered mortgage, linked to decreases in the S&P/Case-Shiller house index. Notice that the plan will concentrate on the creation of "sound modifications". "Under the plan, if the overall anticipated change charge for a creditor, taking into consideration public contributions, is likely to be higher than the immediate enforcement charge for the owner of the home, that debtor will not be considered for a change.
In addition, Treasury will not grant any subsidy to lower interest rate level below 2% for adjusted credit. Lastly, it should be noted that if creditors have not benefited from the financial stability plan (announced by the administration on 10 February 2009), they are not obliged to take part in the plan. The administration reported on April 28, 2009, that twelve service employees, five of whom are the biggest, had already entered into agreements to begin the credit changes.
The plan is thus largely realised. In addition, the Treasury Department will request that all beneficiaries of the Financial Stability Plan take part in the programme until the results of the upcoming stresstests are available. The Directives stipulate that service providers must comply with any explicit limitations on the change of credit that exist in the contract.
Significantly, this guide stands in sharp contrast to the wording of another bill, H.R. 788, sponsor of Congressman Paul Kanjorski, which would explicitly allow staff to ignore pooled and maintenance contracts for credit amendment purpose. A new SLP under the plan will offer extra assistance to risky borrower with more than one pledge on their land.
Obama's administration has estimated that up to 50 per cent of risky mortgage loans have second pledges. Following fears expressed by industrialists that the plan would not solve the problems with the current second pledge, the administration resolved to establish and execute the SLP under the plan. Authorities believe that the SLP will help keep an extra 1 to 1.5 million Americans in their houses by providing an accessible mortgage for those eligible for the first mortgage change but still having difficulty making their second mortgage installments in time.
SLP is a corresponding programme for the first pledge amendment programme under the plan and changes borrowers' second pledge when the first pledge is amendedutomatically. The Treasury Department will contribute to the costs of lowering the interest for the second mortgage to 1 per cent for the amortisation of credits.
It is the duty of all participant service providers to comply with these procedures in relation to changes in the amortisation of second loans: i) reducing the interest to 1 per cent; ii) extending the maturity of the amended second mortgage to reflect the maturity of the amended first mortgage; iii) extending the principle of payment in arrears in the same ratio as any failure to repay the first mortgage (with the possibility of cancelling the capital as described below); iv) after five years increasing the interest to the then prevailing interest on the amended first mortgage; and v) then increasing the second mortgage back to amortized at the higher interest rate(s) over the remainder of the maturity period of the amended first mortgage.
The Treasury pays the investor an incentivising fee of half the difference: i) the interest rates on the amended first pledge as amended; and ii) 1 per cent (with one floor). In the case of pure interest bearing mortgages, the Ministry of Finance shares the costs of lowering the interest for the second mortgage to 2 per cent.
It is the duty of all participant service providers to comply with these procedures in relation to changes in the amortisation of second loans: i) lower the interest to 2 per cent; ii) apply the principle of repayment in the same ratio as any failure to repay the first mortgage (with the possibility of repaying the capital as described below); iii) after five years increase the interest to the then prevailing interest level of the amended first mortgage; and iv) then amortise the second mortgage over the longer part of the residual life of the amended first pledge or the initially planned repayment period (the repayment commencing on the date specified in the initial contact).
The Treasury pays the investor an incentivising bonus of half the difference: i) the lower of the interest rates on the second pledge and the interest on the first pledge in its amended form; and ii) 2 per cent (with one floor). SLP will also benefit from a performance bonus corresponding to the first deposit programme under the plan.
The SLP allows Servicicers to receive $500 in advance for a successfully completed upgrade and then receive $250 in annual performance fees for 3 years as long as the upgraded first pledge continues to apply. This payment to the Mortgagor is automaticly made to the Mortgagor on the first Pledge to help the Mortgagor accumulate capital in the House.
In addition, under the SLP, a creditor or sponsor has the possibility to write off the second pledge against immediate Treasury payments using a proprietary Treasury methodology. According to the equation, for credits that are more than 180 day overdue at the date of the amendment, the creditor or shareholder is to receive 3 cent per dollars of outstanding debt.
In the following chart, the other relevant credit formula is shown for credit less than 180 day past due, based on the backend DTI of the borrower under the plan and the LTV of the collateralised property: Please be aware that the SLP will be a volunteer concurrent programme with the first Pledge Change Programme, and service technicians may opt not to attend the SLP.
If, however, a servant participates in the SLP, when the first pledge of a debtor is changed, the second pledge is also changed by default in accordance with the above mentioned rules. As part of the plan, the administration will work with the Swiss Institute for the Information Society, the Swiss Housing Administration, the Swiss Housing Agency and the Swiss central banks to establish common policies for mortgage adjustments for all Swiss central banks and the retail sector.
It is important that the plan states that the administration will make diligent changes to the insolvency laws regarding single petitions for insolvency. Among the changes that the administration considers necessary when a person goes into liquidation in person, their mortgage loan, which exceeds the actual value of their assets, would be considered insecure debts.
The amendment would allow a receiver to devise an inexpensive scheme so that the owner can make further payment. It attempts to allow receivers to alter mortgage loans that have emerged in recent years as a last resort once borrower alternatives have been used up. According to the terms of the agreement, this "cramdown provision" only applies to Fannie Mae and Freddie Mac mortgage loans that meet credit lines.
The credit information from the changes made under the plan will be collected so that the authorities and the wider business community can assess performance and make any necessary changes. For this purpose, the Ministry of Finance will hold meetings on a quaterly basis with the FDIC, the Federal Reserve, HUD and the FMFA to make sure that the plan is on the right path to achieving its objectives.
When the plan was announced on 18 February 2009, the administration declared that one objective was to enhance the usefulness of the HOPE programme. In order to make sure that more debtors take part in the HOPE programme, the administration said it would aim for changes in legislation that would allow the FTA to lower the charges levied by debtors, enhance lender agility, change problematic credits, allow debtors with higher levels of DTI to obtain qualifications and allow payment to service providers of current credits.
Additionally, at the beginning of the plan, the government declared that as part of the American Recovery and Reinvestment Act (the "Recovery Act"), which the President of the United States of America ratified on February 17, 2009, HUD 2 billion in competitively priced subsidies will be awarded to the Neighborhood Stabilization Program for innovation programmes that mitigate isolation. Launched by the Obama administration on 28 April 2009, the new HOPE programme provides the context for the direct integration of the HOPE programme into the plan.
Under the new terms, when evaluating a borrowers for an experimental change under the plan, the service provider will be obligated to assess the borrowers for a funding of the HOPE program and provide the funding facility to the borrowers if they are qualified. If the service provider finds that the borrowers are qualified to fund the HOPE programme, the service provider is obliged to provide the funding at the same times as the experimental change offering.
Service providers and creditors who fund HOPE program borrower credits also earn performance fee compensation similar to other incentives under the plan. Service personnel can obtain an advance of US$2,500 to successfully fund the HOPE program. In addition, creditors introducing new refinancing for the HOPE program are entitled to contingency royalties of up to $1,000 per annum for up to 3 years as long as the refinanced debt continues to be outstanding.
Please be aware that these pay-for successful completion charges are due only to plan members and not to other creditors who exclusively fund the HOPE program. HOPE program demands that the owner of the present pledge accepts the revenue from the new secured credit as full inpayment. Therefore, the typical capital requirement for an issuer to be able to refinance a HOPE programme is to write off the capital.
Including the HOPE programme in the plan, the administration assumes that some depositors now want to assume the losses for a guarantee amount instead of making an expanded change with the borrowers. On April 28, 2009, the Administration also disclosed that either the Treasury Department or the GSE's HOPE program will buy Ginnie Mae II's specific HOPE program packaged by the GSE's.
Aim of these acquisitions is to improve cash flow in the aftermarket for new HOPE program credits. Governments also stated that they would press for continued legal reforms to the HOPE programme that would allow the FHA to lower the charges levied by creditors, improve the lender's degree of agility, allow creditors with higher DTI to upgrade their skills and reinforce and improve the HOPE programme as a whole.
Much of the successful outcome of integrating the HOPE programme into the Plan will depend on the revision of the HOPE programme's existing funding needs, which to date have successfully refinanced fewer than 100 borrower groups. In the third part of the plan, Fannie Mae and Freddie Mac offer more power and resource.
This plan announces that the Treasury will increase its preferred stock agreements with Fannie Mae and Freddie Mac to $200 billion each from their initial levels of $100 billion each. Treasury Department points out that it will further buy Fannie Mae and Freddie Mac mortgage-backed bonds to foster market instability and solvency.
At the same time, Treasury will begin to increase the amount of GSEs' mortgage portfolio held back by $50 billion to $900 billion (along with corresponding increase in eligible receivables). It will work with Fannie Mae and Freddie Mac to assist the state home financing agents in supporting home buyers throughout the country at the state tier.
Lastly, the administrations stress that the $200 billion in financing pledges are made under the Housing and Economic Recovery Act and do not use funds from the Financial Stability Plan, the Emergency Economic Stabilization Act or the TARP programmes.