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Q: How can I get rid of my second lien?

Answer: Market conditions are excellent for you to negotiate a settlement on your 2nd mortgage – down to 30-cents on the dollar or more – under the right circumstances.

Now is the time to get rid unnecessary debt in the form of a 2nd loan. It will also be mandatory to eliminate junior liens to qualify for a HAMP modification.

The circumstances are especially ideal if your 2nd loan is unsecured in a non-recourse state and you are upside down on your equity between your 1st and 2nd. In other words, there is no equity in your property to cover the 2nd lien holder’s interest in the property.

If you have been making your payments on the 2nd lien, you are going to have to get the attention of the lender by doing something that may, at first, be uncomfortable for you, namely, stop making payments.

Otherwise the lender may not be that motivated to negotiate with you. Why should they if they are still getting your money? // Answer continued after video //

Watch this Q&A coaching segment for more details on negotiating second liens

Loan modification expert, Mike Rockwood, and his son and business partner, discuss this scenario in detail with a borrower in this situation.

So just like getting the attention of your lender, who holds your first mortgage, loan modification expert, Mike Rockwood, and author of the loan modification workbook I recommend, plainly tells borrowers that you will need to stop making payments to motivate your lender to negotiate with you. The same will likely be true when dealing with your 2nd lien lender.

Unless you have a loan modification already in place on your first loan, especially a 2nd loan that is unsecured in a non-recourse state, Mike Rockwood, explains that the loan will eventually just go to charge off. This status is one step closer to never being collected on again. Woo hoo!

The lender can sell the paper on the secondary market and the new owner of the paper will approach you for a settlement for a fraction of the balance you owed…even much less than the 70% discount you were considering negotiating before the loan became a charge off.

Check the laws in your state to verify if it is recourse or non-recourse state with regard to home mortgages.

Bankruptcy protection is another 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.

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.

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

Homeowners – Need Some Sound Advice?

Get Out of Debt Workbook
Seasoned debt expert shares several little known but highly effective techniques guaranteed to get you out of debt fast – no matter how much you currently owe.
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Also get the latest foreclosure news around the country, read Q&As and other resources.

Legally Restore Your Credit
If you are visiting this blog, you likely have mortgage lates, which are a big blemish on your credit report. Once you resolve your mortgage situation, you can legally remove those mortgage lates and all derogatory credit from your report without having to hire an expensive attorney or credit repair service.

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4 Responses to Q: How can I get rid of my second lien?

  1. Dave in Phoenix on 20/01/2010 at 05:02

    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.

  2. Mohammed M Rahman on 04/08/2010 at 07:24

    I have a 2nd Loan which is a home equity . Chase bank Gave me $145,650.00 when my House was
    625K appraised by chase bank.Now my house price is 400k . Please give me a sugetion. Bankruptcy Chapter 13 will help me/or not , I have first mortgage which permanent modification was done but bank of america did not reduced my principal.what Law can established my principal reduction.Also I have 45K credit& card personal loan.My tele #6467278027/////8453627931/

  3. Gail Simmons on 11/08/2010 at 11:59

    Mohammed, I wrote a post about getting rid of second liens here: /2010/01/19/q-how-can-i-get-rid-of-my-second-lien-to-qualify-for-a-hamp-loan-modification/

    If you do not want to pursue the BK strategy and want to try and negotiate with your home equity lender, typically the lenders are giving priority to borrowers who are delinquent on their loan.

    So you may have to weigh negotiating a reduced principal/payment vs. credit profile dings with the late payments that will show up.
    If you choose this option, you should protect yourself from the lender selling your home “accidentally on-purpose” out from under you using a government program. Read this article:

    Filing for BK is no longer as easy as it used to be. There is a good article about credit card debt relief options that explains how the BK process now works:

  4. sarah on 28/09/2011 at 15:13

    I just came across your website. I just completed a HAMP modifciation on my only residence. I had a second, but that never came up in the modification – does that mean there is no 2nd. That 2nd lender (Saxon) got a judgment about 2 years ago – by doing that, have they in effect removed the loan/lienn for me? Will I have to file 13 to get rid of it, or will I be able to do a 7? BTW, my 1st mortgage is for about $8,000 more than what it appraised for. Thanks.

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