Bank of America steps up foreclosure prevention efforts

NEW YORK (CNNMoney.com) -- One roadblock slowing President Obama's foreclosure prevention program seems to be clearing away. Bank of America, the nation's largest mortgage lender, said Tuesday that it was the first lender to agree to lower or eliminate payments on second mortgages.

This federal initiative, called the Second Lien Modification Program, pays incentives to second mortgage holders to work closely with first mortgage holders under the Home Affordable Modification Program.

First mortgage holders have been reluctant to lower payments when there was a second lien involved because they did not want to take on losses while leaving payments on the second mortgages intact.

The lack of an agreement with second lien holders "has been a major impediment to getting successful modifications done," said John Taylor, CEO of the National Community Reinvestment Coalition, a group whose members include foreclosure prevention counselors.

Without alteration to the terms of second mortgages, first mortgage holders often have to lower their payments even more to hit the HAMP target requiring that borrowers' total mortgage payments represent no more than 31% of their pre-tax income.

"For many homeowners facing severe financial difficulty, decreasing the payment on the first mortgage without a reduction in the payment on the second lien may not produce an affordable combined mortgage payment," said Barbara Desoer, president of Bank of America (BAC, Fortune 500) Home Loans.

The second lien plan has been in the works since last spring, shortly after HAMP was initiated, but implementing it proved difficult.

HAMP itself has been a disappointment. Originally designed to help as many as 4 million borrowers obtain mortgage workouts, it had produced fewer than 70,000 permanent modifications as of Dec. 31. Another 800,000 or so homeowners were in a trial-modification phase.

The Treasury Department hopes the second lien program will make a big difference. It's estimated that as many as half of at-risk mortgages are burdened with second liens.

Signing on Bank of America was an important first step because it is the nation's top mortgage lender with 14 million loans outstanding, including 3 million second loans.

The lender said it has all systems in place to begin implementing the program as soon as the final program policies and guidelines are released by federal regulatory agencies. That is expected to happen soon.

More banks are expected to sign on to the program very quickly, according to a Treasury spokeswoman.

"They need a lot more of the major banks to sign up," Taylor said.