2d Mortgages

Posted by Kevin on November 30, 2010 under Bankruptcy Blog | Be the First to Comment

Last week, the Wall Street Journal had an article about how second mortgage holders are putting the kabosh on short sales.

Hedge funds are buying out second mortgages for pennies on the dollar.  The second mortgage is underwater.  The homeowner can sell the property for less than the amount of the first mortgage.  For example, the first mortgage is 300K.  The second mortgage is 50K.  The owner gets a contract for 275K.  Owner contacts 1st mortgagee (lender) for short sale.  1st mortgagee agrees.  Done deal?  Not so fast.

In steps the second mortgagee.  The second mortgage is a lien on the property.  Unless that lien is taken care of, the new buyer cannot get title insurance and, therefore, cannot get a mortgage loan.  Owner is SOL unless it can take care of the second mortgage.

In the “old days”, people had 2d’s with the same bank that they had their first mortgage with (home equity lines of credit).  It ain’t the old days.  Second mortgages are either in trusts or have been sold to hedge funds and these guys are playing hardball.  They are not settling for 2-3 cents on the dollar.  They want more and are using their lien position to get it.

What to do?  Pay them.  OR   Perhaps, Chapter 13 can provide a solution.  In a Ch 13, a debtor can “strip off” a totally unsecured mortgage holder (mortgage holder that is completely underwater like in our example).  That means that the mortgage lien is gone (if you complete the plan) and the 2d mortgage holder is treated like an unsecured creditor.  If you have a 5% plan that will pay $50K total, the 2d will get a little less than $2500 paid out over 36 to 60 months.

Whether you actually file the Chapter 13 will depend on this issue and other significant issues.  You should always consult with a lawyer before making that decision.  However, the spectre of a Ch 13 strip off may aid in your negotiations with a stubborn 2d mortgage holder.