While President Obama, Tim Geithner and Ben Bernanke continue to advance plans to improve the economy offering answers about how homeowners, lenders and even judges can modify loans, one important piece of the puzzle is often left out: second mortgages.
Current legislation aimed at incentivizing lenders to modify first mortgages may not be enough to solve the housing crisis if second lien holders have a say in the process. And while the mortgage cramdown bill may help more consumers stay in homes, it is fiercely opposed by lenders, Wall Street investors and their representatives. The Mortgage Bankers Association issued a letter to Congress last year describing in no uncertain terms their opposition to the bill.
From Reuters:
Those relatively modest investments, or second liens, allow lenders to veto the refinancing plan and they might do so since those small stakes add up to big dollars.
Bank of America held $148 billion in second liens at the end of last year, while JPMorgan Chase held $131.4 billion and Wells Fargo & Co. held $129.9 billion, according to Inside Mortgage Finance.
Since Fannie Mae and Freddie Mac were effectively nationalized in September, the government has used the mortgage-finance companies to try and alleviate the housing crisis. Private banks, however, are more difficult to control.
Last week, the Treasury Department hosted a meeting of large mortgage servicers to discuss the question of second liens and the broader housing rescue.
Big lenders generally support the housing rescue plan but have misgivings about Treasury’s intentions for second liens, several industry sources said.
“The (housing rescue) plan does nothing to benefit the second lien beyond attempting to provide a framework that allows the first lien to perform and get paid,” said Terry Francisco, a spokesperson for Bank of America.
The plan does not make clear whether the second lien holder will ever get paid off, but if the first lien continues to perform, odds improve for the health of the second mortgage, Francisco said. He hopes the discussions with Treasury lead to a workable process to deal with second liens.
Moe’s Analysis:
The second mortgage problem may not be as great a difficulty to overcome if the mortgage cramdown bill passes. Indeed, a lot of people may not know that in some circumstances judges have the authority to modify second mortgages already.
For homeowners who have taken out a second mortgage on their home, facing financial difficulties can be particularly challenging. In most cases, a second mortgage reduces your home equity to a very small amount, leaving you vulnerable to the whims of your lenders. In cases where real estate values have declined, as we are seeing in most markets today, there are strategies that you can use to protect yourself from excessive debt.
Current bankruptcy law allows judges to approve the loan modifications of the terms of certain debts, namely auto and student loans and second-home mortgages. In the case of second mortgages, if the value of the property falls below the loan amount, debtors potentially could reduce the balance of the loan to equal the current value of the property. This is known as lien stripping.
Additional liens on your home beyond your initial mortgage, whether you have taken a second mortgage or just another related lien, could be negated in the case of a Chapter 13 personal bankruptcy filing.
Liens can be stripped off of the debtor’s assets in Chapter 11 or Chapter 13 when there is not enough equity in the asset, after deducting senior liens from the property’s current market value, to secure the unsecured in whole or in part, where the lien exceeds the value of the debtor’s property.
Section 506 of the Bankruptcy Code acknowledges that a lien is only a secured claim to the extent there is value in the asset to which it attaches. To the extent that the claim exceeds the value of the collateral, that portion of the claim is unsecured.
Hopefully legislators will disentangle the second mortgage problem soon. I just hope that a judge’s authority to strip a second mortgage maintains and that the cramdown bill passes, allowing a judge to modify the first mortgage as well.
in the state of ohio can a second mortgage be “stripped”? i’ve heard that in the 6th circuit district it is impossible.
I am sooo glad that I read the article from the attorney that said homeowners still have a good chance of modifying their loan by calling the mortgage company themselves. I almost got scammed by a New York law firm and I live in California. Why do they request people to pay first before providing a service and is that legal?
Can a second mortgage lender start foreclosure proceedings even if this loan (second mortgage) is unsecured – there is no equity left after paying off the first mortgage? If so, what would be their goal?