Squeeze play on 2nd mtg?

[jb4lcm]

Squeeze process on 2^nd?

My 1^st mtg is 150K. My home equity line rolled into a 30 yr fixed a year ago – it is also at 150k. The house is currently worth approx 250k.


I was told by a trusted source “congratulations! – you just won the jackpot!” Please tell me what you think of his suggestion:

Keep paying the first, stop paying the second which will force them (squeeze) to negotiate or be forced to foreclose. He believes the bank does NOT want to foreclose and would PREFER settle for a lesser amount as they are already unsecured for about 50K. He thinks they may settle for as little as 25k-30k.

I would need to find a private investor who would loan the cash to make the settlement that would then be given a NEW 2^nd on the house and I may have found an investor.
This process would result in a 1099 from the current holder of the 2^nd, but would also create equity for me.

What information do any of you have that would support this risky option? Is there a way to find out where a reasonable amount a bank would settle for in lieu of foreclosure?

[bcohen]

I think your "trusted source" is a fool. Since the HELOC is secured by $100k of equity--a figure which will only increase as you pay down the first mortgage and the house appreciates, why would the lender want to settle for $25k to $30k? It is true that if they want to foreclose, they have to pay off the first mortgage in order to pass clear title, however there is enough equity to make it worth their while.

[LadyInTheRed]

I agree with bcohen. There is no jackpot in that strategy. Only a pipe dream.

[jb4lcm]

the idea is, the "typical" person who is about to lose their home may have decide to take all valuable assets from the home and sell them (cabinets, granite, AC, stove, etc) leaving the place requiring a lot of expense to bring it back to market presentation. Time, expenses, commissions ... reduces the return on the foreclosure. That - and - the point that most major companies have already sold the note that is unsecured as this and have already rid themselves of the loss on their books. Somebody is probably sitting with a reduced value/investment on the note.

While I agree that it appears that 100K of potential equity might look like there is something to go after, the presented logic makes an interesting possibility based on the position of the second and the "typical" expectation of what they end up with compared to the value of a home that is in tip-top market value - which is what the 100k of equity is presumed upon.

[bcohen]

No, I didn't know that the "typical" person vandalizes their house, and strips out items which really can only be sold for peanuts, but which cost a lot to replace. I did know that in some jurisdictions, that "typical" person could be prosecuted for criminal damage to property, and that in most jurisdictions, that "typical" person could be sued for a money judgment--even if deficiency judgments are generally prohibited.

Also, I didn't know that since "most major companies have sold the note that [it] is unsecured" because that is pure BS. Although the originating bank likely doesn't own the note anymore (they sold it) and the servicing company may not own the note (they may just be a contractor working for the actual owner), someone owns that note, and that someone has the right to foreclose if you default on the loan.

Furthermore, although I explained it as the HELOC lender having to "repay" the first mortgage in order to foreclose, that is really a simplification. The holder of the note could simply make an agreement with the holder of the first mortgage note to foreclose together, or they could assign the loan in exchange for another similar loan in good standing. The point is that the company isn't going to write a check for $150,000 to begin foreclosure.

[jb4lcm]

If the 1st is current the holder of the 1st cannot do anything because it's not in default. If the 2nd decides to foreclose -they have NO CHOICE but to pay the 1st and they get what's left over. That's why the first is called the 1st - they are in first position for repayment when the property is sold. So I don't know where you are getting these opinions about who can do what when the first is current. I'm also confused by your statement that that's it's "BS" and then make a contradictory statement "Although the originating bank likely doesn't own the note anymore (they sold it)" isn't that what I said? They don't own it any more?

If "someone owns the note" - meaning, the originating lender sold it - the new holder of the note bought it at a discount due to being unsecured. NOBODY buys a note (2nd TD) from a bank that is unsecured. banks manage their loss quickly and don't hold onto bad loans.

[LadyInTheRed]

Actually, investors buy unsecured notes all of the time. But that's beside the point.

If the current owner of the note bought it at a deep discount, then foreclosing on $100K in equity could bring a huge profit.

I have never heard of any lender with that much equity settling for the amount you want to settle for. Ask your reliable source for real life examples of that happening. The argument about the house being stripped is not convincing. If foreclosure doesn't bring a high enough return on their investment, more likely than a settlement is that they will wait until you have paid down the first or the home increases in value before they foreclose. Or maybe they will sell the note along with a lot of others just like it.

[jb4lcm]

Thanks for your input. While I still see some potential in the process, it's losing its appeal. A lot of fight and risk.