Today I spoke with a friend who is at her wit's end dealing with her two mortgages. She and her husband were fine until they were hit with economy-related work reductions and some unforseen expenses. Despite the fact that it would almost certainly be to their advantage to walk away from their home loans, they want to do the right thing, keep their house, pay their bills, and not uproot their kids.
Isn't the Home Affordable Modification Plan (HAMP) supposed to take care of this problem? Yes, it is. The homeowners have a documented hardship. They are capable of making their payments if the prescribed modifications are made. However, the participation of second lienholders is "not required" according to the treasury department. Here's what it says about second liens:
Second Liens: While eligible loan modifications will not require any participation by second lien holders, the program will include additional incentives to extinguish second liens on loans modified under the program, in order to reduce the overall indebtedness of the borrower and improve loan performance. Servicers will be eligible to receive compensation when they contact second lien holders and extinguish valid junior liens (according to a schedule to be specified by the Treasury Department, depending in part on combined loan to value). Servicers will be reimbursed for the release according to the specified schedule, and will also receive an extra $250 for obtaining a release of a valid second lien.
In my friends' case their first mortgage lender has been willing to work with them on a mortgage modification that gets their payment down to a workable level. But their second mortgage holder won't budge. In fact, the loss mitigation department refuses to work with these people because they have "too many debts." And the rep threatened to foreclose if the required payments weren't made. My buddy wanted to know if the second lienholder could really do this.
Can the holder of a second mortgage foreclose if you're current with your first mortgage? The short answer is yes. A second lienholder can foreclose for non-payment even if you are in good standing on your first mortgage. Foreclosing involves filing the required documents (in this case a Notice of Default) and all public notices and forcing the sale of the property. But the first lienholder gets paid first. So to protect its interest the holder of the second mortgage typically pays off the first mortgage. Which brings us to...
What's wrong with this picture? There is no equity for the second lienholder to wrest from the homeowner. The borrower has a home currently worth $225,000. The first mortgage balance is $250,000, and the second mortgage is $40,000. The borrowers are currently $65,000 under water. Right now the second mortgage lender is out $40,000 if the homeowner doesn't pay. By foreclosing it will end up $65,000 in the hole, plus the costs of foreclosing.
In addition, the HAMP guidelines state that foreclosure actions are halted while the modification is being hammered out. So it's not like the house could just be yanked out from under the family while they are trying to work this out.
So if you are between a rock and a hard place with your second mortgage lender, and your property is under water, you can reasonably assume that the second lienholder won't foreclose on you. The lenders have everything to lose by foreclosing and nothing to lose by working with the homeowners. But there's no guaranty that some lenders won't be stupid.
5 Responses to "Second Mortgage Holder Jerking You Around?"
Mary,
I'm beginning to think that they do this in order to delay the modification and thus lessen the time you get to have a lower interest rate (increasing their revenue). In addition, the longer you make a trial payment without having an actual modification, the greater the amount of arrearages they can tack on to your balance when (if) they finally modify your mortgage. And as long as no one is forcing them to be more efficient or fair some lenders will continue to have the advantage of their bailout money without offering anything tangible in return. Meanwhile, others have stepped up and are processing loan mods fairly quickly.
My husband and I have been trying for a loan modification since 2008 with our 2nd mtg. They either loose the paper wk or they wait til its out of date. One rep tells us one thing and another tells us entirely different. No one lets the left hand know what the right hand is doing.
Anonymous has a point in that analysts have found that many lenders prefer to add arrearages to the balance and stretch it out because it doesn't diminish the value of the loan on their books. And often, this kind of modification isn't substantial enough for the homeowner to make the payments month in and month out, ultimately resulting in foreclosure anyway. Be careful in what terms you aceept when you work a lender to modify your mortgage.
Janet, I'm very very glad you were able to come to terms with your lender. However, if as in your case they lowered your rate and got you a workable payment, you seem to have accomplished a win-win situation.
you mean the 2nd was tacked on
I have had that same problem. You are right, they made lots of threats but ultimately did not foreclose. I finally got my mortgages modified and they added my late payments to the balance and lowered my interest rate and stretched out the term.