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Fixing the Housing Rescue Plan: Obama to Offer New Incentives to Servicers

Here’s another interesting tidbit from The Wall Street Journal: The Obama Administration is expected to unveil new incentives today to encourage servicers to modify loans — particularly second mortgages. The failure to address the problem of second mortgages in the initial housing rescue plan launched in March was a glaring weakness, and the new monetary incentives for servicers to modify them is an attempt to correct that oversight.

The issue of second mortgages has been dogging policymakers ever since the onset of the foreclosure crisis. A large share of troubled borrowers also have a second mortgage on their home, which is typically owned by a different investor than the first mortgage. Such borrowers may not be able to afford their monthly payments if only the first mortgage is modified.

The administration’s effort on second mortgages is also aimed at soothing the concerns of investors, who have been crying foul over the Obama housing plan’s incentives for servicers. They argue the first mortgage shouldn’t be modified if the second one is left untouched. They also contend the banks that dominate mortgage servicing are conflicted because they own more than $400 billion of second mortgages. Such banks stand to gain from modifying the first mortgage because the second mortgage is more likely to be repaid once the homeowner is saved from foreclosure.

Whether servicers will go for this — under the new plan, they will get $500 upfront and $250 a year for the following three years for successfully modifying a second mortgage — remains to be seen. But whatever happens, I think it’s time to give the Obama administration some credit here. First, officials came up with a housing rescue plan in a very short amount of time, and now they are quickly stepping in to correct a weakness in it. At the same time, the plan attempts to address the dual problem of helping homeowners behind on their loans, while offering lenders and servicers some way to benefit from loan modifications as well. And the Obama administration accomplished all of this by expending political capital in the face of strong public sentiment against helping troubled borrowers. That’s far beyond anything the Bush administration ever did to address the housing crisis.

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