Second mortgages are now starting to make their way into the ever-shifting foreclosure battlefield. As the housing market fell famously to pieces and took real estate values down with it, pushing scores of homeowners underwater, first mortgage holders were left holding the bag. That is if they had the only loan on the property. During the bubble that just visited the housing market home buyers often used a second mortgage to keep the down payment to a minimum, or nothing at all, and avoid paying PMI, or private mortgage insurance. 100% financing became quite popular those days.
When a foreclosure hits today, the second mortgage holder, or a debt collector who has purchased the second lien, often gets nothing at all because of the merciless erosion of home prices. The first may get something close to what the actual balance is in a short sale or as a REO sale. In the most affected areas during this downturn like Las Vegas properties frequently are way upside down and the first position gets pinched quite a bit, too.
Home loan providers and debt collectors who own second mortgages are beginning to hone their skills to grab something when a homeowner is in danger of a default. One of the new tactics they've come up with is get a judgment from a court to freeze the homeowner's bank account, or allow them to clean out the account altogether to satisfy their claims. The other one is to get a court to approve garnishment of paychecks.
This of course weakens a homeowner's position to seek loan modification. He is already struggling to make mortgage payments as it is and all of a sudden the paycheck is cut, or bank account frozen, that likely will negate a possible solution where he can keep his house. Moreover, now the first lien holder finds itself in a bind, too. The chance it had to salvage something out of this through modification is greatly diminished. It may now actually seek legal action of its own against the second mortgage holder, who essentially appears to be carrying out an end-run over the established foreclosure process.
Las Vegas valley - featuring communities like Henderson, Mountains Edge, Silverstone Ranch, Summerlin, Green Valley, Rhodes Ranch and Charleston Heights - homeowners ought to be aware of this possibility. There are scores of homes in here with second mortgages that are underwater and many could easily get snagged in this type of a game.
The property owner who is already in the weeds knee deep with mortgage payments could now find himself in the middle of a brewing lender duel. What a mess.
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Provided by:
Esko Kiuru
Mortgage and real estate market commentator
www.BluefoxToday.com - syndicated mortgage and real estate blog
eskokiuru@gmail.com
My cell: 702-499-1006
Great blog post. Thanks for sharing this information with us. Keep up the good work.
Esko, banks are asking to freeze accounts at other banks? I had heard of it if the accounts were in the same bank, could you please clarify? Thanks.
Wow, sounds like many will be lawyering-up. Follow the money. Interesting post.
Hey Esko,
I wonder if second lien holders are doing this because of a recent announcement by the Treasury (from http://blog.hsh.com/?p=6365):
On Tuesday [Oct 13] we wrote that the Treasury Department’s Office of Homeownership Preservation (OHP) announced that a new wrinkle to the Federal loan modification program is coming soon. The new loan mod effort will provide incentives to second lien investors to persuade them to participate in loan mods.
Lawmakers — and borrowers across the country — are up in arms to why more modifications aren’t being done at an even faster rate. Second lien investors have absorbed much of the blame, criticized for their slow participation in the process. Tuesday’s announcement by the OHP was designed to speed things along.
However, that “new wrinkle” — the involvement of second-lien investors — is perverting the nature of the contract that has existed between first and second lien investors for decades:
(From the WSJ) One reason the MBS market blossomed in the first place is because investors who bought a mortgage security believed that first mortgages were senior to second liens. In the event of a foreclosure, second liens would be extinguished first and holders of the first mortgage would get what was left because that’s what the contract said.
Has this new "wrinkle" given these second Lien holders the unprecedented gusto at going after what they believe is owed to them? Has the Federal loan mod program created another unitended consequence for borrowers? The Treasury created this new "wrinkle" to speed things along, and now it seems as though it's making things worse for homeowners.
Surprised? I'm not.
Nice post,
Tim
Heather,
Thanks for stopping by.
Sharon,
Seeking to freeze accounts in the borrower's bank, that's what some of the second lien holders are doing.
Alix,
The legal profession is having fun with all this.
Tim,
Thanks for bringing more details to what is going on here. The recent Treasury "wrinkle" may well have spurred second mortgage holders to this action.
Esko, what they are doing may seem harsh, but all the more reason why Borrowers need to really look at they are getting themselves into, because in the end, they are the ones that stand to lose the most.
To many homebuyers hid their heads in the sand, and closed their eyes to mortgage payment that they new was beyond what they felt comfortable paying. Unfortunately many Borrowers wanted the house so bad, that they ignored common sense.
Someone was just asking me what would happen if they defaulted on their 2nd, if the 2nd would actually foreclose. Well here is an answer for them!
George,
It's a tough situation for everyone involved in this real estate crash.
Renee,
Some second mortgage holders are getting more aggressive now.