As the debate about the implementation of principal reductions continues to heat up, a question of mortgages with second liens has taken a the spotlight as a topic of much controversy.
A number of industry experts argue that if principal mortgage reductions go into effect, many borrowers who hold second liens will be forced to start making payments to the major lenders who hold this second home loan.
However, less than 18 percent of mortgages backed by Fannie Mae and Freddie Mac currently have second liens, according to estimates from HousingWire. If this is the case, the impact of principal reductions could be far less devastating than some argue.
After a number of months of weighing the pros and cons of implementing such an initiative, the Federal Housing Finance Agency, which oversees mortgage activity at Fannie and Freddie, says it could make a formal decision on the matter by the end of April.
However, other critics say that since roughly 75 percent of borrowers with mortgage backed by the GSEs are underwater, but current on their monthly payments, it could result in a wake of strategic defaults as borrowers scramble to capitalize on the program. This fear is believed to be overstated by those who are in favor of principal reductions.