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Mortgage Modification: Another Hurdle for Some

If you took out a ‘piggyback’ second mortgage (aka a ‘junior-lien loan’) to cover, say, your down payment or private mortgage insurance (PMI), then you may have problems if you need a loan modification. Difficulties are most likely to arise if the second mortgage is with a different lender from the first.

The Federal Reserve Bulletin for December 2008 highlights the issue, starting on page A111 of the document.

As I understand it, problems most often arise where the value of the property has dipped below the combined totals outstanding on the two loans–in other words when the home is underwater. In those circumstances, the piggyback lender is unlikely to get its money back if the borrower defaults. So the two lenders–both of which have to approve any modification–have conflicting interests, and the holder of the junior-lien loan may well withhold consent.

So if you face such a situation, and you’re thinking of modifying, start the process early, before any arrears arise that might cause the piggyback lender to fear for its money. And if you’re taking out a new mortgage, ask your advisor to make sure that you won’t have any junior-lien loan problems later.

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