There is a “hidden” component to the real estate and financial crisis, and it gets very little attention by the media. I’m referring to the problem with second mortgages on homes that have lost market value during the real estate crash. Banks are being allowed by the Treasury Department to keep large portfolios of second-lien mortgages on their books at values close to those before the bubble burst.
Some estimates indicate that up to 50% of at-risk properties include this type of loan, so it’s a huge problem. There are more than $1 trillion in outstanding second-mortgage loans, with more than 40% of that concentrated among the four largest lenders. With housing prices down more than 30% average since 2006, many of these second liens are either completely without equity as collateral, or very close to it. Today, the major banks are carrying these notes at 86-93% of book value, when some estimates indicate that they are actually worth only 40-60 cents on the dollar on average.
Many consumers are unaware that it’s often possible to settle with creditors on second mortgage obligations for greatly reduced principal balances. Why would a second lender agree to a settlement on a debt that is secured? Simple. Once the property drops in value below the level where even the first mortgage is under water, then the second lender is completely exposed and is very unlikely to recover anything by way of foreclosure. In that situation, a settlement for even 10-15% of the face value on the mortgage often makes sense for the lender.
For example, let’s say you purchased a home for $300,000, with $30,000 down payment and a first mortgage of $270,000. Later the property appreciated in value $400,000 when the market was at its peak. Like so many Americans, you borrowed against the increased home value and took out a home equity line of credit (HELOC). With the home valued at $400,000 against a mortgage of $270,000, you had $130,000 of equity to work with. Being prudent, you didn’t borrow all of that, only $100,000. So you had a first of $270,000 and a HELOC for $100,000. Then the real estate crash happened. Your $400,000 house is now worth only $250,000, less than you originally paid for it. This means that the first mortgage of $270,000 is itself under water, since the house would sell for less than you owe on the loan. And therefore the second lien is 100% exposed. There is no collateral at all remaining to cover this note. In practical terms, this type of obligation can be settled the way any unsecured debt (like a credit card account) can be settled.
At ZipDebt, we’ve been assisting some of our clients to settle second mortgages, and the results have been nothing short of amazing. We’re seeing 10-15% settlements routinely, even less in some cases. But it’s important to understand that not all second mortgages can be settled, nor is it appropriate to use this strategy in all cases where the property is distressed. Sometimes there are other solutions more appropriate to the specific situation. It really requires a detailed analysis to determine whether a second mortgage or HELOC is suitable for the settlement approach. There are a number of key factors involved, such as whether the home is primary or a rental property, whether the state the property is located in is a “recourse” or “non-recourse” state, the specific type of mortgage contract involved, and of course, the equity figures relative to loan face values.
UPDATE: April 5, 2012
As of April 2012 we are offering PAID CONSULTATIONS ONLY on second mortgages or HELOCs, and no longer offer free consultations on this subject. Our fee is only $150, and includes 30 days of follow-up support via email. We made this change because our experience has been that each mortgage situation is totally unique, and requires careful analysis and discussion before a solid recommendation on strategy can be made. We have had so many inquiries on the topic of second mortgage or HELOC settlement, that we felt a paid consultation would be the most efficient method of assisting consumers to avoid scams and make the correct strategic decision. For additional details, please visit our other website at SecondMortgageAdvice.com.
UPDATE NOVEMBER 26, 2012:
Gerri Detweiler of Credit.com recently interviewed me on Talk Credit Radio on the subject of second mortgage and HELOC settlements. This is an in-depth podcast that covers a lot of important information consumers need to know on this topic. If you’d like to learn more about debt settlement as it pertains to mortgages or HELOCs, this is the audio file you’ve been hunting for! Click here to download the full podcast free of charge.
michael says
Question – I had a HELOC with Banco Popular that I stopped paying. It was charged off and sold. I settled with the purchaser of the note and it’s reflected and recorded in the deed. Banco still shows that I owe them the entire balance on my credit report after 5 years. Any advice?
Charles says
Michael, if you settled with a purchaser of the note, that wouldn’t necessarily affect the entry recorded by Banco Popular, as they would have no knowledge of your settlement. Try writing dispute letters to the three major bureaus, on the basis that the balance should be zero, and include a copy of your settlement letter as proof.
Staci says
I filed for Chapter 7 BK and was discharged in March of 2011 after negotiating my own modification agreement with my first mortgage. I owed $350K on the first and could not afford it. Without asking me to reaffirm the debt, they offered me a forbearance of $97K and had me paying on only $253K at 2% for the first five years, 3% on the 6th year, 4% on the 7th year and 4.85% for years 8-30. In the meantime, a balloon payment on my HELOC with Wells Fargo is coming due in the amount of $63,5K. I did reaffirm this debt. However, I’m unable to pay the $63.5K due. I’m now in contact with their modification department and my loan is under review. If they can’t modify the loan, they say they’ll refer me to the department that deals with balloon payment problems. If THEY” can’t help me, they’ll refer me to the department that deals with settlements.
I now owe $330K on the first. Minus the forbearance, I’m only paying on $233.5K principle. According to Zillow, my home is worth around $330K. According to Wells Fargo (my second mortgage lender) it was appraised at around $312K. Therefore, my first mortgage barely breaks even with my home value and the 2nd mortgage puts me underwater by approximately $64k.
My questions are these:
1) Does Wells Fargo still hold second lien status if a) I didn’t reaffirm the first mortgage and b) they weren’t asked to sign any agreements regarding the modification on the first? Since it wasn’t a re-fi and the first merely modified the original terms of the loan, I’m hoping Wells Fargo will see they have very little skin in the game and do their best to negotiate with me.
2) If WF is second in line, can they still foreclose on my property and would they want to, knowing that they would not likely make anything from the sale of the home?
3) If we can’t agree upon a reasonable modification, the “balloon payment problem” department can’t help and I end up discussing a settlement, will I still be able to retain my home? Also, generally speaking, what percentage of pennies on the dollar would be a reasonable settlement?
My home is in California. I’m current on my first mortgage and was current on all payments for the second. In 3-5 years, it’s very likely that I would be at a break even point for both loans but that nasty balloon payment has got me in a crunch. Any insight or advice would be greatly appreciated!
Charles says
Staci, yes, Wells Fargo would still hold second lien status. There shouldn’t have been anything about the modification on the first mortgage that would have affected that position. Yes, they can still foreclose even though they are in the second position, but they would have to fully satisfy the first mortgage balance before receiving anything, and they would also have to absorb the costs of the foreclosure action. Some of your questions I’m not able to answer without spending more time reviewing the situation, and there are also tax consequences to be understood before you adopt a settlement strategy. One thing I would recommend right away is that you have a counseling session with a HUD agency representative, who can review your numbers, look up the loans, and help determine if any of the government modification programs (such as 2MP) might apply to your situation. If you would like a full discussion with me, then please order the $150 consultation via SecondMortgageAdvice.com
In a Jam says
Staci:
Who was your lender and how were you able to negotiate such a fabulous modification? I am in a similar situation and curious to know as my modification has been dragging on for over 1.5 years with no end in site and no real indication from the lender that they will offer ANYTHING in the way of a mod. Please advise. Thanks!
Charles says
“In a Jam,” the modification that Staci described sounded like one granted via the Home Affordable Mortgage Program (HAMP). If you’ve been at it 1.5 years, that’s probably because you’re trying for an in-house modification with no government backing. Modifications are granted or denied on the basis of the lender’s analysis of your financial ratios.
Gail says
wondering if you can help. I have a first mortgage that is current. I have a second mortgage that is current. I am having a very hard time paying the second mortgage and all my bills. Between the two I am underwater by about 50k. What would happen if I stopped paying the 2nd mortgage. I know a few people who have gotten letters from there lenders forgiving the 2nd mortgage. I’m not so lucky. Can you help. I live in New York
Charles says
Gail, I would need to spend up to an hour on the phone with you to gather all the information I would need to advise you. So I’m not able to provide direct assistance via short blog posts, sorry. If you want a thorough discussion and analysis, please order the $150 consultation package via SecondMortgageAdvice.com.