Incorporation Of Hope For Homeowners Into Making Home Affordable
Servicers participating in the Making Home Affordable program will be required to evaluate all borrowers eligible for modifications under Making Home Affordable for refinancing under Hope for Homeowners. If a borrower is eligible for refinancing under Hope for Homeowners, the servicer is required to offer to refinance the borrower under Hope for Homeowners.4 Additionally, servicers are required to evaluate for refinancing under Hope for Homeowners those borrowers that are in trial modification periods under Making Home Affordable and offer those borrowers refinancing if they qualify.
Recent news reports have indicated that, as of April 16, 2009, more than six months after the introduction of Hope for Homeowners, only one homeowner has made it all the way through the program and refinanced into a FHA-insured loan.5 To further improve the effectiveness of Hope for Homeowners, the Obama Administration has indicated that it intends to support legislation to, among other things, reduce fees required to be paid by borrowers to FHA and permit borrowers with higher debt loads to qualify. Presumably, this would make Hope for Homeowners a more viable and accessible option.
Pay-for-Success Incentives Similar to Other Making Home Affordable Modifications
Servicers and lenders participating in Making Home Affordable that help borrowers refinance under Hope for Homeowners will be eligible to receive the following pay-for-success incentives:
The Evolution Of Second Lien Loans
Second lien loans were originally a form of distressed debt reserved for companies with cash flow issues. Now, second lien loans have gone more mainstream in recent years and have become a viable part of the capital structure for a variety of healthy companies across a wide range of industries.
Second lien lending is generally provided by major commercial banks, hedge funds and some specialty lenders.
Banks will often originate second lien loans and will spread the risk by either syndicating the loans to outside investors, like hedge funds, or securitizing the loans into collateralized loan obligations .
CLOs are bundles of loans that enable the securities to be sold to outside investors. Both options, along with solid demand, competitive interest rates and a strong economy, make second lien lending attractive for commercial banks.
How Did Second Lien Finance Develop
Second lien debt developed in the US in the late 1990s. The termlien in the United States, means something akin to security interest. Theterm second lien finance was used to refer to debt that was a second-rankingsecurity.
Second lien finance developed in the US as a method for companieswith existing high yield bonds to raise relatively inexpensive debt. It wascommon for high yield bonds to contain anti-layering clauses – provisionsthat prohibited a company from incurring new debt ranking between the seniorand the bonds. However, these anti-layering provisions only prohibited debtsubordination and not lien subordination. Second lien debt circumvented theseprovisions by only subordinating how the proceeds of the shared collateral wasapplied between creditors and not the right to payment.
Debt subordination means a lender must turn over paymentsreceived from a borrower to a senior lender. Lien subordination only requiresthe lender to turn over the proceeds from shared collateral, it does not includeblockage provisions.
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What Is A Higher
In general, a higher-priced mortgage loan has an annual percentage rate thats higher than a specified amount over a benchmark rate called the Average Prime Offer Rate.
The Average Prime Offer Rate is an annual percentage rate that is based on average interest rates, fees, and other terms on mortgages offered to highly qualified borrowers.
Your mortgage will be considered a higher-priced mortgage loan if the APR is a certain percentage higher than the APOR, depending on what type of loan you have:
- First-lien mortgages: If your mortgage is a first-lien mortgage, the lender of this mortgage will be the first to be paid if you go into foreclosure. In general, a first-lien mortgage is higher-priced if the APR is 1.5 percentage points or more than the APOR.
- Jumbo loans: If your mortgage is a first-lien jumbo loan, it is generally higher-priced if the APR is 2.5 percentage points or more higher than the APOR.
- Subordinate-lien mortgages: If your mortgage is a subordinate-lien mortgage, sometimes called a second-lien mortgage or junior-lien mortgage, and you go into foreclosure, the lender of this mortgage will be paid only after your first-lien mortgage is paid off. A subordinate-lien mortgage is generally higher-priced if the APR of this mortgage is 3.5 percentage points or more higher than the APOR.
How Does European Second Lien Financing Differ From The Us
When second lien financing came to the European market it developed slightly differently than in the US. This was largely because the European market already had an established mezzanine debt product, which was similar to the US second lien market.
In Europe, second lien financings have historically been documented in the same facility as the senior debt facility, whereas in the US second lien debt is usually documented separately. However, as the European second lien market has developed it has adopted separate loan agreements for many transactions. If the second lien debt is in the same agreement, then it is common for it to be syndicated with the senior debt. In the US, second lien debt may be syndicated separately. For more information on syndication, please see syndicated finance and loan syndication.
In the European debt markets, it is common for second lien debts to benefit from covenants that are identical to the senior debt covenants. In the US, by contrast, second lien debt usually has less strict or fewer covenants than senior debt.
The right to receive interest on European second lien debt may be subject to payment blockage and turnover provisions similar to those found in mezzanine debt. For more information on mezzanine debt please see mezzanine financing.
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The Mortgage’s Recording Date Usually Determines Priority
Generally, priority is determined by the date the mortgage or other lien is recorded in the county land records. Though, some liens, like property tax liens, have automatic superiority over essentially all prior liens.
First mortgages are, as the name suggests, typically recorded first and are in a first-lien position. Second mortgages are usually recorded next and are, therefore, in the second position. Judgment liens, if any, are often junior to a first mortgage and possibly a second mortgage, as well as perhaps other judgment liens that other creditors previously filed.
What Happens to a Second Mortgage’s Priority if You Refinance the First Mortgage?
If you refinance your first mortgage, that lender will usually require the second-mortgage lender to execute a subordination agreement. In a subordination agreement, the second-mortgage holder consents to subordinate its loan to the refinanced loan. The subordination agreement allows the refinanced loan , which would be junior based on the recording date, to jump ahead in line. The refinance loan then takes the first lender’s place in terms of priority.
How To Use A Second Mortgage
When you take out a second mortgage, you have ultimate freedom in deciding what to do with it. However, financial advisors strongly recommend that you use this money wisely for items that have lasting value, such as making a home improvement, investing in education and funding major expenses. Second mortgages can also be used to consolidate debt, to reduce interest payments or to avoid the need to pay PMI on your first mortgage. Borrowers are cautioned to avoid using second mortgages for everyday expenses or for paying off outstanding debt without having a clear plan to reduce spending and prevent building more debt. Its important to remember that you could lose your home if you are not able to make regular loan payments on your first or second mortgage.
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What Is A Home Equity Loan
A home equity loan is usually a fixed-rate loan distributed in one lump sum, with terms that range from 5 to 30 years. You pay it back in fixed monthly installments. This might be a good loan if you anticipate a large one-time expense such as a wedding, the purchase of a second home, or debt consolidation. A fixed rate and predictable monthly payment can help you budget as you work toward your financial goals.
Calculate Your Home Equity
If you decide to move forward with a second mortgage, youll need to figure out how much equity you have. Your home equity directly determines your eligibility for a second mortgage and the amount youd be able to borrow. Generally, youll need to have an LTV ratio of 80% or lower to get a home equity loan or HELOC. From there, you can be eligible to borrow up to 85% of available equity, depending on the lender and your financial profile.
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How Does Getting A Second Mortgage Work
Its where a loan secured on the property is given from a source other than the original lender.
The second lender takes second priority to the first lender. This means if the property ever needs to be sold, the first lender will have first call on equity in the property.
As with any mortgage secured on your property, failing to repay it could mean youll lose your property.
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When Do Second Lien Loans Make Sense
Second lien loans can be a good solution for borrowers.
Second lien loans generally offer borrowers better pricing than unsecured debt that might carry similar terms. They offer better pricing because most second lien debt carries at least a partial security interest in the borrower’s collateral that is subordinated in the event of default or company liquidation.
Second lien debt does not come with a potential dilution of ownership if problems arise.
It can often be much more desirable for growing middle-market businesses that want to maintain long-term control over the business, or at least have the option to choose when to add equity partners.
Second lien loans can be an effective tool for companies:
- Buying out or paying down a portion of senior debt on the balance sheet.
- Refinancing debt.
How To Get A Second Mortgage
Shop around, and get quotes from at least three different sources. Be sure to include the following in your search:
- A local bank or
- A mortgage broker or loan originator
- An online lender
Get prepared for the process by getting your documents ready. That will make the process much easier and less stressful.
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How Much Can I Borrow
- Most private lenders restrict your Loan to Value Ratio to between 60-75% of the property value at Prime Finance we go to 80% LVR!
- Fast turnaround times
- Loan amount up to 80% of LVR
- Serviceability accountants letter
- Easy lending criteria, minimal application and non-time consuming, an experienced broker will make the Prime Finance application process run smoothly
Can I Use A Refinance To Pay Off My Second Mortgage
If you have enough equity built up in your home, you could take advantage of a cash-out refinance and pay off your second mortgage. After you pay the secondary lender, you will go back to having a single monthly payment.
Keep in mind, you will have to go through the refinance application and appraisal process with your lender. Youll also have to pay origination fees and closing costs for your new loan. However, theres a great chance you could have a lower interest rate, which makes this an attractive option for many borrowers.
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Using A Heloc As A Second Mortgage
Some borrowers use a home equity line of credit as a second mortgage. A HELOC is a revolving line of credit that is guaranteed by the equity in the home. The HELOC account is structured like a credit card account in that you can only borrow up to a pre-determined amount and make monthly payments on the account, depending on how much you currently owe on the loan.
As the balance of the loan increases, so will the payments. However, the interest rates on a HELOC and second mortgages, in general, are lower than interest rates on credit cards and unsecured debt. Since the first or purchase mortgage is used as a loan for buying the property, many people use second mortgages as loans for large expenditures that may be very difficult to finance. For example, people may take on a second mortgage to fund a child’s college education or purchase a new vehicle.
Second Lien Debt Vs Mezzanine Debt
The key difference between second-lien debt and mezzanine debt is that second-lien is lien subordinated only, not debt subordinated like mezzanine debt. Debt subordination means a lender must turn over payments received from a borrower to a senior lender. Lien subordination only requires the lender to turn over the proceeds from shared collateral, it does not include blockage provisions.
The other major difference between second lien debt and mezzanine debt is the price. Second-lien loans are a form of senior loan and as such charge an interest rate comparable with senior loans . Mezzanine loans are much riskier and tend to charge a much higher rate of interest. Mezzanine debt may charge a fixed coupon rate of between 15% and 18%.
Mezzanine finance may also include a payment in kind where the amount of principal can be increased in lieu of payment by the borrower. Mezzanine financings are also often unsecured by the assets of the borrower. If security is taken by a mezzanine lender then it will normally be deeply subordinated to the security interests of other lenders.
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Uses Of Second Mortgages
There are few restrictions on how you can use the funds from a second mortgage. Many people use a second mortgage to fund big expenditures such as home improvements or repairs, to buy a second home or to pay off a big debt. Its generally not a good idea to use it for something frivolous such as a vacation or new clothes, because you are risking your home in the process.
Second Mortgage Vs Refinance
A second mortgage is not the same as a mortgage refinance. In a mortgage refinance, you are replacing your current mortgage with a new one. With a second mortgage, you are adding a new mortgage.
A mortgage refinance can be an opportunity to negotiate a lower interest rate or change your loan term. A cash-out refinance is a type of refinancing that allows you to tap into your home equity and get cash as part of the new loan.
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Should I Get A Second Mortgage
Consider how you plan to use the funds from your loan. It’s best to put that money toward something that will improve your net worth in the future. That is because you’ll need to repay these loans, they’re risky, and they cost a lot of money. Here are a few common worthwhile ways to use a second mortgage.
- Home improvements: Renovations are a common use for second mortgage funds because the assumption is that you’ll repay the loan when you sell your home with a higher sales price.
- Avoiding private mortgage insurance : It might be possible to avoid PMI with a combination of loans. For example, an 80/10/10 strategy or “piggyback” loan uses a second mortgage to keep your primary mortgage’s loan-to-value ratio at or below 80%. Just make sure it makes sense compared to paying and then canceling PMI.
- Debt consolidation: You can often get a lower rate with a second mortgage, but you might be switching from unsecured loans to a loan that could cost you your house.
- Education: You may be able to set yourself up for a higher income. But as with other situations, you’re creating a situation where you could face foreclosure. Standard student loans might be a better option.
Beware of risky loan features like balloon payments and prepayment penalties.
Requirements For A Second Mortgage
To qualify for a second mortgage, you will need to meet a few financial requirements. You will need at least a credit score of 620, a debt-to-income ratio of 43%, and you will need to have a decent amount of equity in your first home. Because you are using the equity in your home for the second mortgage, you will need to have enough to not only take out your second loan but also be able to keep approximately 20% of your home’s equity in the first mortgage.
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