Many people with bad credit mortgages are in a bind. Even though they did everything right, getting a home loan with a short or no prepayment penalty, improving their credit rating, and putting themselves in a position to refinance into an FHA mortgage, conventional home loan, or even another bad credit mortgage but with a better mortgage rate. And then home values tanked. Not long ago, most loans for people with bad credit could be gotten with little or no down payment (80/20 plans, with an 80% first mortgage and a 20% second mortgage), increasing the chance that subprime borrowers today are underwater and unable to refinance. To make things even worse, the second mortgages are making it harder for needy homeowners to get the mortgage modifications they qualify for.

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Why should having a second mortgage get in the way of mortgage modifications? Because first and second mortgage holders are tussling over the remaining home equity in your underwater property. See, if you went into foreclosure, your home would be sold, the first mortgage lender would get paid, and the second mortgage holder would pound sand. So the second mortgage on an underwater home in foreclosure is worthless. that extra risk to second mortgage lenders is why the interest rates on those loans is substantially higher than that on first mortgages.

But what about modifications? First mortgage lenders feel that second mortgage lenders should have to make concessions before they do -- after all, it's the second mortgage holders that are farther down the food chain and also getting the higher interest rates. And with HAMP modifications, participating lenders are supposed to reduce the interest rate until the total housing expense (first mortgage, second mortgage, taxes, insurance, HOA does, etc.) comes to 31% of the homeowner's gross income. But is it fair that the first mortgage lender assume the entire burden of reducing the payment? Most think it isn't.

But second mortgage holders often dig in, knowing that as long as there is no foreclosure and as long as borrowers continue to make their payments, they have no to reason to give up anything. In addition, in states that allow deficiency judgments, second lienholders can wait for years after a foreclosure, when borrowers' finances are likely to have improved, and then sue to recover their loan balances and fees. So they can wait and if the first mortgage lender modifies the loan, it puts the second lienholder in a stronger position because the borrower is better able to pay both mortgages.

What can you do? It depends. The HAMP program does make payments to second lien holders to induce them to drop their claims. In some states such as Oregon, bankruptcy courts are wiping out second mortgages on underwater homes, because the loans are for all practical purposes unsecured. Unsecured creditors don't have the same rights as secured creditors like first mortgage holders. "This is really important, and no one knows about it," said Eric Olsen, a Salem bankruptcy lawyer whose firm has been among the most active in employing the second-lien strip. "I talk to real estate brokers, bankers, even attorneys, it's just not known that you can get rid of your second mortgage."

So it might behoove you to speak with a bankruptcy lawyer even if you don;t want to file for bankruptcy protection. I know several people who have had good luck negotiating with their lenders once they know what their rights are, and once the lender knows they know.