In Florida, when considering foreclosure issues, most discussions relate to first mortgages. However, there are many, many homes here in Florida that have more than one mortgage, and these “second mortgages” are now getting some well-deserved attention in the national spotlight as the New York Times published an editorial this week entitled, “The Second-Mortgage Shell Game” by NYC Legal Aid Lawyer Elizabeth M. Lynch.
Con artist favorite: the shell game (public domain image)
What is a Second Mortgage?
Before the recent crisis, the “first” mortgage was the one usually connected with buying a house. The first mortgage is part of the home purchase. However, as family grow and time passes, events occur that for many families requires the need for extra cash. There are unexpected medical expenses. A child needs money to go to college. Or, more and more often in these troubling times, it seems prudent to borrow against your home by taking out a second mortgage at a lower interest rate that you are paying on all of those credit cards. Consolidating debt to get a lower interest rate and hopefully a lower monthly debt payment has seem like a good idea for lots of homeowners.
The lender on a second mortgage recognizes that the first mortgage will get paid off in its entirety before the second mortgagee will see a dime, if there is a default by the borrower. (It is “subordinate” to the first mortgage.) Accordingly, the second mortgage lender is not going to be willing to lend as much money as the first mortgage lender, or at the same interest rate. Notwithstanding these concerns, second mortgages are commonplace in the banking world.
What is the Shell Game?
According to the NYT piece, as much as 25% of all U.S. mortgage debt is second mortgage debt. This debt is being forgiven and modified in a fury right now, (under the Big Bank Settlements this type of forgiveness is required), but the problem is that by modifying second mortgages the home’s first mortgage is remaining as is — and it is usually the first mortgage that causes the borrower to lose their home.
Banks are modifying second mortgages to meet the terms of the settlement: they can report that they are modifying mortgages as they agreed to do. Thing is: it’s not going to protect people from losing their homes especially if they can’t pay that first mortgage, and the banks aren’t modifying those big first mortgages in this scheme.
By not modifying the first mortgage many homeowners find themselves facing foreclosure, just as if the settlement never happened. And the bank isn’t worried about the second mortgage, because in a foreclosure that second mortgage isn’t worth anything to the bank anyway. Sweet deal – and a sneaky one – for the bank. Bad deal for the borrower.
And according to the New York Times article, those five Big Banks in the Big AG Settlement are having their way with second mortgages right now. Their numbers: three times as many second mortgages were forgiven as first mortgages were modified in the State of New York during the first 6 months of the settlement period.
Three times as many.
Larry Tolchinsky’s Tip: The federal government’s HAMP program recognizes the need to modify second mortgages and does help borrowers deal with second mortgage default problems if certain conditions are met:
- Your first mortgage was modified under HAMP.
- You must not have been convicted within the last 10 years of felony larceny, theft, fraud or forgery, money laundering or tax evasion, in connection with a mortgage or real estate transaction.
- You have not missed three consecutive monthly payments on your HAMP modification.
The New York Times expose sheds light on the Big Banks’ strategy to maximize their profits under the settlement agreement reached with the state Attorneys General. That agreement is unrelated to the HAMP program, but I wanted to share with you that there are other programs out there that can help. (Note that HAMP’s Second Mortgage program by definition only occurs after the first mortgage has been modified by HAMP.)
It doesn’t seem as if the Big Banks here (i.e., Ally Financial (formerly GMAC); Bank of America; Citibank, JP Morgan Chase, Wells Fargo) are really trying to helping people with underwater mortgages because they aren’t focused on offering first loan modifications. Instead, these Big Banks are more interested in offering second mortgage modifications — and often, they’re more interested in a Short Sale (where they can try and keep hold of that deficiency balance while the home is sold and part of the loan is paid off with the sales proceeds).
The settlement agreement did not specify that these Big Banks had to modify the primary or first mortgage. By offering second mortgage modifications, the settlement agreement terms aren’t being violated and the Attorney General cannot claim that the agreement has been breached. Mortgages are being modified, the banks will retort. And they will be right…however, it’s just second mortgages that are being modified in record numbers.
Florida home owners with underwater mortgages or those dealing with a foreclosure, or a short sale, can find help in negotiating with these Banks for a modification by having an experienced Florida foreclosure defense lawyer at their side. This gamesmanship is just another example of how there is unequal bargaining power in any transaction between a bank and a borrower: having an attorney advocating for you in these transactions can help level the playing field.
Be careful out there.
Do you have questions or comments? Then please feel free to Chat with Larry in the comments below, at firstname.lastname@example.org, or (954) 458-8655. If you have a specific or personal situation, please call or email Larry because he can’t answer specific fact questions in general comments.
“I’m happy to take your call.”