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.
