There was an interesting article over in the Financial Times recently highlighting the issues homeowners with 2nd mortgages may face as they try to get a FHA short refi after October 1st. The HOPE loan program requires that any 2nd mortgage be resolved before one can refinance into a new FHA loan so 2nd mortgage holders have the power to scuttle attempts to refi. Here are some quotes:
“The second-lien holders have the potential to hold the process hostage because they ask, “What’s in it for me?”” said Michael Stevens, senior vice-president with the Conference of State Bank Supervisors.
“What’s the incentive for the second-lien holder to say, “I’m going to give up my security interest in the mortgage to keep the borrower in the home when I get nothing”?”
The problem could become widespread for borrowers seeking to refinance. Credit Suisse estimates that half of subprime homebuyers in 2006 took out a second mortgage for their purchases — and many other types of mortgage also have a second lien on the property. The second mortgage market is estimated at $1,000bn, SMR Research says.
Keith Johnson, president of Clayton Holdings, which collects mortgage payments, suggested government action might be needed to speed the renegotiating process. “You need a simple, easy, broad-based solution that I don’t know if anyone has really come up with yet,” he said. “You may need regulatory action.”
Traditionally, homeowners took second mortgages to refinance high-interest credit-card debt or pay for renovations. In recent years, homebuyers also have taken out second mortgages to finance downpayments. About 30 per cent of the second-lien market consists of such piggy-back mortgages, SMR Research says.