What can I do about my Second Mortgage?

We keep hearing about the Administration's "Making Home Affordable" program. In order to qualify, homeowners had to meet several requirements which have been outlined in my earlier posts. Additionally, few lenders were interested in it because many homeowners in trouble have a 2nd Mortgage. The thinking being, "As a 1st Lienholder, why should I willingly reduce the payment I receive? Any help I give the homeowner will go directly to the 2nd mortgage and they will be getting all of the benefits of my helping the homeowner out. How is that fair?"

On, April 28, 2009, the U.S. Treasury announced an Update to the "Making Home Affordable" program (here's the press release). This program is designed to "incentivize" 2nd Mortgage holders to do the following:
1. Reduce the Interest Rate on a 2nd mortgage to 1% which the government will match by 1% for a period of 5 years
2. Extend the term (number of years to repay the loan) to match the "modified" 1st mortgage
3. Proportionally match any principal forbearance by the 1st mortgage
4. After 5 years, the interest rate on the 2nd will increase to the same level as the interest rate on the 1st mortgage

If you have an Interest Only 2nd Mortgage, the terms seem even more generous:
1. Reduce the Interest Rate on the 2nd Mortgage to 2%
2. After 5 years, the interest rate on the 2nd mortgage will match the 1st mortgage
3. Amortization of the 2nd loan will be either
a. the same schedule of the modified 1st loan, or
b. the same schedule as the original 2nd loan (whichever is longer)
Essentially, this means that if you have an Interest Only loan, you may be able to pay Interest Only for another 5 years! Almost Free Money!

Lender participation in the program is voluntary. Servicers will most likely weigh the costs of potential litigation by their investors (for taking reduced payments) with the benefits offered by the government. Alternatively, the government is offering a lump sum payment to the 2nd mortgages which roughly translates into 3% of the unpaid balance. Some 2nd mortgages hold out for more than this in a short sale so it will remain to be seen how much of an incentive this will be.

After all is said and done, what does this mean as a homeowner?
My feeling is that this is a temporary lifeline to homeowners. I don't believe lenders will willingly reduce any principal on the mortgages because it's too risky for them. After all, if the housing market recovers and prices begin to rise, the person who "lent" the money for a homeowner to purchase a home, will, in the end, want to recover as much of their money as possible. Additionally, why would a lender willingly reduce the principal when the government is literally throwing money at them to reduce interest rates for up to a 5 year period?

So, as a homeowner, what should you do? Here are my thoughts:
1. Try every avenue possible to get your loan modified. If you qualify for a modification, you just bought yourself 5 years before it will be a problem again.
2. Every 6 months determine what your house is worth. Go out to 3-5 open houses every weekend. See every house that closely resembles your house and what the asking price is. Find out what houses are "selling" for and not what they are "listed" for. The "selling" prices are the actually house values.
3. As soon as the housing value are higher than yours, get out of the mortgages you are in by either refinancing or selling. Don't forget, your lifeline expires after 5 years. Any drop in housing prices and you may find yourself back in the same situation.