Majority of 2nd mtg is under water by $245k, but still has some equity of $80k......

[ThinkingBK13]

Hi all,

I have a 1st mortgage of $520k and a 2nd mortgage of $325,000. The house is worth approximately $600k. (at high was worth 1.3 million)

I have my 341 meeting next week on my non-consumer BK 7. I am current on both the 1st and 2nd, but decided to stop paying on the 2nd starting this month. Would like to do a stay and pay but cant afford both the 1st and 2nd.

My question is, will the 2nd mortgage move forward with a foreclosure when I stop paying? The 2nd is underwater by $245k, but there is equity still there of $80k for the 2nd mortgage company. What do 2nds do in this situation? I have read if the whole second was under water, I would have no issues until the house regains value. But I have not seen any answers to my situation where there is still some equity; $80k in my situation. Do you think the 2nd mtg company will foreclose? The 2nd is with a large credit union in Seattle.

Thanks in advance for your help.

[HHM]

No one can say. The 2nd mortgage has the right to foreclose for non-payment In order for the 2nd mortgage to take possession of your home, it must buyout the 1st.

I doubt they would foreclose, but no one can say for certain.

What has been happening, is that 2nd mortgages, instead of foreclosing, are suing in regular state court to get a judgment to go after personal assets, e.g. wage garnishment. They may also initiate a foreclosure in hopes someone will buy the 2nd mortgage (at a steep discount). The buyer of the mortgage can then opt to pay off the 1st and take possession of the home (sort of like a tax lien sale).

[ThinkingBK13]

Hi HHM,

Thanks so much for the reply. So in my case, if my BK7 goes through as planned without any issues, the option for the 2nd Mtg lender to sue me would be off the table since I would no longer owe personally on the 2nd mtg since it would have been discharged in the bk7. So the only other option would be for the 2nd mtg lender to foreclose. So if I understand this correctly, in order for the 2nd mtg lender to foreclose, they would have to pay off the 1st mtg ($520k) in full? Wouldnt they just foreclose and the highest bidder would take the property? The 1st receiving the funds and anything left over going to the 2nd mortgage lender? If the 1st is not paid off in full from the sale, the 2nd mtg lender would have to pay the difference or the shortage? Or the 2nd mtg lender has to first physically pay off the 1st mortgage before they can even proceed to foreclose and goto auction? If that is the case, I doubt the 2nd mortgage lender would want to throw $520k at a debt with the hopes of obtaining best $80k. But if the 2nd mortgage lender just has to foreclose and allow for an investor to come in and purchase who would then payoff all or most of the 1st mtg, then I could see the 2nd mortgage lender perhaps taking that chance to get $80k. Something maybe better than nothing in the eyes of the 2nd mortgage lender. Thanks again in advance for your help. Im just confused on the process of a foreclosure done by a 2nd mortgage lender.

[LadyInTheRed]

I agree that nobody can say for sure, but the 2nd is not likely to foreclose with so little equity, at least not right now. They may just wait until you pay down the first enough to make foreclosure worth while.

If you can't afford the 2nd, your best bet for keeping the house is probably to try to save money to eventually settle and hope you save enough before they foreclose.

[ThinkingBK13]

Thanks LadyintheRed.

That is my goal....to stop paying on the 2nd and hopefully settle with them later. IF not, I would not have wasted the money on payments to them while I basically rent the house after my bk7.

But now Im debating whether I should stop paying on the 1st as well hoping to get better terms on the 1st via a loan modification. I obtained a loan mod on the 1st from Chase a year ago via a Champ loan. Do you know if they allow another shot at a modification at Chase even after obtaining a modification a year ago? Im hoping now that the loan will be discharged, I would have better chances of getting a better mod?

Im just very confused on whether to bail on the house and try to live rent free as long as possible or to stay and pay on the house now knowing I can most likely stop paying on the 2nd which makes the payment more manageable for me.

Thank you.

[catleg]

I think the 2nd steps into the shoes of the equity holder of the property, so they have to settle the 1st lien prior to (or during) foreclosure.
Might be to your advantage to stop paying the 1st too, since the holder of the 2nd is (in the long run) gaining equity as you pay down the 1st.
The trouble with the 2nds is that when they're owned by large banks they really really really can't afford to recognize the losses.
They are really counting on dragging out this process over decades.
Which is why when I see headlines like "real estate ready to rebound" I just laugh. :-)

[LadyInTheRed]

The problem with stopping payments on the 1st is that the 1st has equity and is a lot more likely to foreclose.

I don't know what your chances of modification are. There are non profit organizations that help with modifications. You might try talking with one of them before stopping payments on the 1st. You might also try the forums at loansafe.org.

[catleg]

Yes he is essentially a renter in his own home, his rent is the amount of the 1st mortgage payment!

[newphoenix]

I second the vote for looking at the forums at loansafe. I filed a non-consumer chapter 7 back in 2009. It wasn't closed until 2010. Like you I couldn't afford to keep paying on the second. I lost my job and stopped paying the second in June 2011. My house's value is about $305,000 which is what I owe on the first. I just sent in a settlement payment at the end of February. I should have a lien release within the next two weeks for the second. I read the forums at loansafe I made the best decision for me.
Good luck!

[ThinkingBK13]

Newpheonix,

If you dont mind me asking, what was your settlement details? How much did you end up settling for on what amount of debt? I would feel much better if the 2nd was a national lender....but since my 2nd is with a local credit union known to be aggressive, I dont feel so confident. But I do follow loansafe and will try to settle with the 2nd as well. That would be my goal....but in the meantime know I need to stop making payments on the 2nd and was nervous to do so knowing the 2nd has some equity. But at this point, that would be my only option in keeping the property. Best case, I stop paying on the 2nd and the 2nd does not foreclose and years down the road I settle for pennies on the dollar. Worst case I stop paying on the 2nd and I live in the house for sometime without paying the 2nd before they foreclose. I think I may actually stop paying on the 1st with Chase too after the BK with the hopes of getting a better modification. Thanks everyone for your help!

[newphoenix]

Hello ThinkingBK13,

I settled a 2nd that was about $101,000 for $5,000. The lender was a large regional bank (US Bank) not a credit union. I too have heard that credit unions are more aggressive so I don't know if they will settle or not. My first was with BOA but I didn't try to modify it. It was discharged with my 7-so I'm just staying and paying.

I hope that the strategy works for you too!

[ThinkingBK13]

Newphoenix,

That is a great deal....$.05 on the dollar.