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.
Last comment very old, be surprised if anyone is looking here.
Purchased in 2005 height of bubble. With a first and a second to avoid mortgage insurance.
I defaulted on second years ago when I had back injury and went to disability.
I was planning for years on a Chapter 13 to remove the 2nd as the home was DEEPLY underwater. Just last month,
received offer from Chase owe around $20K offer is for $1645. “Will notify credit reporting agencies debt has been settled”
I just have to worry about taxes, not too terrible, I have 4 children and collect SSDI disability.
Should I take it? or is it a set up?
Hi Heather, I’m still here. 🙂 The settlement offers I’ve seen from Chase have been legitimate. I advise people to settle old defaulted second mortgages when they are able to, because conditions might change later and a good deal no longer available.
Hoping you are still here! I refinanced in 2005 to remove another person from my loan, I ended up with a terrible 1st/ 2nd combo but made it work for a long time, then the ARM came due on my first mortgage, I was able to get the lender to modify that loan and get back on track, the mod was still crappy, I/O for 10 years, but was at least a fixed from an ARM. . Then during the economic crash in 08/09, I had lost my job, just after having my daughter, money was tight and i stopped paying the 2nd. It is in charge off status, and has been for quite some time, I have actually gone through a HARP modification in 2013 on my first, and was able to get my mortgage back to paying principal with a payment i could afford. I have not dealt with the 2nd mortgage as it has been charged off, and i didnt have the xtra cash flow until recently to do anything. The issue I have is that I DO have equity, and a decent amount of it due to the market changes in Colorado. I want to settle this debt ans get the lien released, it is the only thing still haunting my credit… i have a 735 scredit score, and can only get credit cards or high interest personal loans… no auto financing of any sort. I want to finish getting my credit back in shape, and adult again. I have made on time mortgage payments on my first for over 6 years (probably closer to 8). What are my options? Will they consider a settlement for lower, or because I have equity, am i stuck paying the whole thing?
Colorado,
Yes, I’m still here, but I don’t offer the paid consultations on second mortgage situations anymore. Briefly, I’ll say that I do still see second mortgage settlements coming through from time to time, and the older the default the more likely it can be settled. A very important factor is whether the original lender still owns the note or has sold it to an investment firm. Post-sale it can be more difficult to settle out. If it’s with the original lender, then it also depends on which one. The equity is definitely going to be an impediment, but if you haven’t paid the second since before 2010 there is probably still a path to settlement. I’m not understanding why there is any impact on credit if it’s that old. After 7.5 years the default shouldn’t appear on your report anymore.
Hello,
I took out a $20k loan way back in 2008 with my house as a collateral. I stopped paying after a few months due to hardship. I stopped hearing from the company after a while and I completely forgot about it. Ditech started contacting me a few years ago probably around 2015 or 2016. I do not remember but they just keep sending letters every now and then. Shellpoint bought the loan from Ditech and they are the ones sending me letters and leaving voicemails. I was behind with my first mortgage and there was a sale but I was able to get it modified by filing Chapter7 to postpone the sale while we apply for a modification. It was approved and I just finished my 3 months trial loan modification with my first mortgage and started my permanent loan modification this month, July 2020. I have $40-$50k equity. Will second mortgage foreclose on a $20k loan? What are my options? Thank you! .
Michelle, I’m no longer providing the paid consultations on second mortgage situations, sorry. What you should do is research the Statute of Limitations period for your state, to determine whether you are past that point (as you probably are if you stopped paying in 2008). Generally speaking, it’s unusual to see any foreclosure attempt beyond that period. But you should also consult with an attorney to get advice specific for your state. I recommend the National Association of Consumer Advocates, http://www.consumeradvocates.org.