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Q: How can I get rid of my second lien to qualify for a Hamp loan modification?
ShareThisQuestion: How can I get rid of my second lien to qualify for a Hamp loan modification?
Answer: There is a strategy you can use, depending on your state’s laws, that will allow you to legally wipe out your second mortgage or equity loan.
The details are outlined in an article about what Oregon homeowners are doing to get rid of their second mortgage:
An increasing number of Oregonians qualify to use a rarely utilized bankruptcy court maneuver to reduce, or even eliminate, their second-mortgage or home-equity debt.
To be eligible, homeowners must owe more on their first mortgage than their house is worth. That’s an increasingly large segment of the population. Recent studies indicate that 20 to 25 percent of Americans are “underwater” on their home mortgages.
Mike Rockwood has modified five of his own loans, including his personal residence and investment property. He has created a top-notch workbook to walk you through the steps of fighting to get the best terms on your loan modification.
The workbook also explains the second lien stripping strategy.
Click here to get proven help with your home loan modification
The strategy works like this: Homeowners must first file Chapter 13 bankruptcy and file a motion asserting their home’s value has diminished to the point that it’s worth less than they owe on the first mortgage. If the motion prevails and the lender doesn’t challenge, the court will then cancel the lien the second-mortgage lender holds on the home. The lender’s secured debt is converted to unsecured debt, which most often is eliminated in full in the bankruptcy process.
It’s not a painless strategy. Filing bankruptcy will significantly damage a consumer’s credit.
With Oregon’s foreclosures running at unprecedented levels and the federal government’s mortgage modification program proving a cumbersome disappointment, the “second lien strip” strategy could give some over-leveraged homeowners a new path to recovery.
“This is really important, and no one knows about it,” said Eric Olsen, a Salem bankruptcy lawyer whose firm has been among the most active in employing the second-lien strip. “I talk to real estate brokers, bankers, even attorneys, it’s just not known that you can get rid of your second mortgage.”
Olsen’s firm successfully eliminated more than $3.8 million in second-mortgage and home equity debt for 75 clients in 2009 and has another 29 cases pending, he said.
Case Study
Doug Mackay credits the second-lien strip with saving his family from homelessness.
Mackay puts a lie to the critics’ stereotype of second- and third-mortgage holders as high-living deadbeats. He is a truck driver. He and his wife, Susan, lived in a doublewide mobile home in Prineville.
They found themselves in financial crisis in 2007 after their 16-year-old son, Shaun, critically injured himself in a high-speed ATV crash.
“He exploded his liver,” Mackay said. “He was in the ICU for 31 days and went through 12 surgeries. The total bill was somewhere around $400,000.”
His health insurance covered just 40 percent of the tab.
Then came 2008 and $4-a-gallon fuel, which ate into the self-employed long-haul driver’s income.
Unable to pay their bills, the Mackays saw creditors repossess their pickup, their camping trailer and the Volvo semi that was at the heart of their trucking business.
The couple filed for Chapter 13 bankruptcy Dec. 19, 2008. Their bankruptcy attorney, Rex Daines, a partner in Olsen’s law firm, suggested the Mackays could rid themselves of their third mortgage.
Mackay had taken out three mortgages against his house in part to fund his trucking operation. The debt on his house, among the three mortgages, totaled $145,033. That made sense when his home boasted a value of $190,000.
But then came the housing crash, which was particularly brutal in central Oregon. Mackay said in his bankruptcy that his house’s value had plunged 36 percent, to $120,000.
Mackay’s lender, Washington Mutual, did not contest the lower value. That allowed Mackay to strip the lien WaMu held on his house as the third-mortgage lender and convert the $28,500 third mortgage to unsecured debt, which was entirely discharged in the Chapter 13 bankruptcy.
Broadly speaking, there are two kinds of creditors in bankruptcy, secured and unsecured. Secured creditors have a right to repossess collateral put up by the borrower, often their home, if they fail to repay the loan. Unsecured creditors have no collateral.
The point of the second-mortgage strip is that it converts a second-mortgage lender from secured status to unsecured, which the debtor can often shed in full in bankruptcy.
The move helped lower Mackay’s house payment by $400 a month, which has allowed him to keep the place. Mackay got a job with a Washington trucking firm.
As long as the Mackays make the $735-a-month payments called for in their Chapter 13 bankruptcy plan, the third mortgage is effectively eliminated. If they fail to make those payments, the third mortgage is once again payable in full.
Lenders rarely contest lower value
Most of the debtors are using opinion letters from Realtors to peg the new, lower value of their homes. Lenders can contest the value, but rarely do.
“In my experience, they’re mostly going unchallenged,” Chapman said.
There are at least two reasons for lenders’ relative passivity. First, it’s impossible to dispute that property is worth significantly less than it was two years ago.
Second, in today’s bleak environment, even if a lender successfully shuts down a homeowner’s attempt to shed his second mortgage, the lender may be no better off.
Tom Hooper, a Portland creditors’ attorney who represents banks, pointed out that even if a second-mortgage lender successfully contests a homeowner’s valuation, the homeowner could just give up and walk away from the home, tossing the keys to the lenders.
Then, in the event of foreclosure, the first-mortgage lender, not the second, gets the home or the sale proceeds when the home is auctioned.
Source: http://www.oregonlive.com/business/index.ssf/2009/12/underwater_oregon_homeowners_f.html
Before completing and sending in a loan modification package, you may want to obtain some coaching to combat the stall tactics banks/servicers are using to cut to the front of the line of other applications and get approved faster
Click here to get proven help with your home loan modification
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He may be referring to the 2MP program which is to modify 2nd’s after 1st is.
However it is voluntary and no participants have signed up. Treasury says banks are still interested and its being worked on. The problem is the incentive is too low so no banks want to participate.