CA for 2nd Mortgage is threatening foreclosure...

[cheyenne52883]

I will try to make this as short and simple as I can.

My mom and stepdad divorced about 1 1/2 yr ago. She kept the house and he is paying her alimony plus paying the 2nd since it was used to pay off his credit card debt.

He has since stopped paying the 2nd, gone on disability and filed for bankruptcy. Now the 2nd has gone to a collection agency and they are threatening to start the foreclosure process if my mom can't come up with $8,100 in 30 days. Since the ex is on disability and she isn't receiving alimony, she can't come up with the money.

I know that the loans are more than the house is possibly worth and I believe that the 2nd is about $60,000.... Do you think it is likely that a CA for a 2nd mortgage will start foreclosure especially when she is still current on the 1st and the house is over encumbered?

Is bankruptcy an option? Foreclosure better? Suggestions? Advice? Anything?

Thanks.

[Methuss]

Well firstly (and more for the benefit of other readers), I think you are probably aware that divorce decrees are not binding on creditors.

If your mother did not sign on that 2nd mortgage, there could be a complex issue here as to if the creditor even has a right to foreclose. This would be because if your stepfather, as part of the divorce, turned over all property rights to your mother, then the lien becomes questionable. I would first seek the counsel of a real estate attorney to figure this out. If your stepfather has no property rights and your mother did not sign the Note, then the lender may have no recourse.

Now, if your mother did sign this Note, then the problem now is that the stepfather's bankruptcy eliminated his obligation and put the burden on your mother entirely. There are a couple of things to be done. First challenge the lienholder. You will find a sticky I wrote in the collection section called "Letter to your mortgage servicer." Read that and send out a RESPA letter. With all the confusion and sale/resale of mortgage backed securities many of these lenders do not have the documentation required to foreclose. You may be able to extinguish the lien if they have lost or destroyed the Note securing the mortgage.

And if all else fails, your mother can file a chapter 13 bankruptcy petition and have the attorney file a motion to extinguish the 2nd lien on the home because it is wholly unsecured by the value of the property.

Luck with you.

[cheyenne52883]

Thank you for your reply... I will have to ask my mom if she signed on the note or not since I am not 100% sure.

[OMGWhatHaveIdone]

And if all else fails, your mother can file a chapter 13 bankruptcy petition and have the attorney file a motion to extinguish the 2nd lien on the home because it is wholly unsecured by the value of the property.

Luck with you.

Methuss,

What exactly does "wholly unsecured by the value of the property" mean with regards to a ch-13? I'm interested in further clarification on this one. Can you PM me with the answer?

[jq26]

There is a good thread at the top of this forum about lien stripping 2nd and 3rd mortgages. There is a good explanation of wholly unsecured. But basically it means that the entire portion of the loan has no underlying security interest.

For instance, house bought for $120k with $0 down with a piggyback loan. First loan is $100k, second loan is $20k. At the time of purchase, both liens were fully secured.

A year goes by. Housing market starts to turn. FMV of home is now $110k. The first loan is still secure. The second loan now is 50% secure and 50% unsecured. The second loan is referred to as partially unsecured.

Another year goes by. Home now worth $95k. The second loan is now wholly unsecured because there is no longer any asset underlying the l;oan to secure it (the first loan has priority over ALL of the security interest). Its then possible to circumvent the bar against discharging loans that are secured against the debtor's primary residence because there is no security interest on loan two. In theory, the holder of loan two is no better off than a credit card company and should be treated equally with othjer unsecured debtors as far as receiving a mere pro-rata unsecured distribution with no interest in the house remaining at the time of discharge.

[Methuss]

Lets simplify jq26's answer.

If your house is worth less than what you owe on the first loan, then the second loan would get nothing if the house is sold. Therefore the second loan is unsecured by the property.

In a Chapter 13 (NOT 7!) you can strip the mortgage lien of second (and other junior) loan that are unsecured. They become no better than a credit card debt in the bankruptcy with no power to take your home regardless of how much they get paid in the bankruptcy proceeding.

A warning: Junior lienholders fight like hell to prevent their lien from being stripped. If you are in this situation and contemplating Chapter 13 to get rid of a second or third lien, make sure your attorney understands that there may be litigation. And you need to understand that you will have to pay extra to your attorney if there is litigation. Bankruptcy mills that just churn 'em out will not agree to do this extra paperwork. You will need an attorney that will do the extra work.

[Aerovette]

I think it would be rather foolish for the 2nd to foreclose. Since the first lien has to be satisfied from any proceeds on a sale before the 2nd gets anything, they would only foreclose as punishment to you, not as a means to recover funds. Then again, you would still owe the debt. Not sure what the motivation is.

[Methuss]

I think it would be rather foolish for the 2nd to foreclose. Since the first lien has to be satisfied from any proceeds on a sale before the 2nd gets anything, they would only foreclose as punishment to you, not as a means to recover funds. Then again, you would still owe the debt. Not sure what the motivation is.

It's not the actual lienholder who is the problem here. It is the servicer of the loan. Servicers generally have their own legal departments to handle foreclosures. It is more profitable for the servicer to foreclose than to accept regular payments. The servicer doesn't give two shakes that the actual second lienholder would get nothing. The servicers would come out $10-$20k ahead in legal fees collected during the proceeding as a priority claim.

So it really isn't about punishment. It's about the servicer taking advantage of the situation to profit more.

[jq26]

It's about the servicer taking advantage of the situation to profit more.

Okay then. But that means that the 2nd lienholder is taking it on the chin for the benefit of the servicer. Some service. Either lienholder #2 is an idiot for not having some sort of clause allowing them to have input or they just aren't paying attention. Either way, the business entity holding lien #2 (I'm assuming a bank) has created a horrendous business model for themselves which, if these things persist, rightly put this lienholder out of business.

[Methuss]

Okay then. But that means that the 2nd lienholder is taking it on the chin for the benefit of the servicer. Some service. Either lienholder #2 is an idiot for not having some sort of clause allowing them to have input or they just aren't paying attention. Either way, the business entity holding lien #2 (I'm assuming a bank) has created a horrendous business model for themselves which, if these things persist, rightly put this lienholder out of business.

Many of these service agreements are for collateralized debt instruments....packages of loans sold to investors. The investors, who are the owners in due course, are not being contacted to ask what they want. The original terms of the CDI set up the servicing agreement, which in general, gives the servicing company rights to act in any way they see fit in relation to collecting on the loan.

[cracrap]

you'll need to crunch the numbers but from a practical standpoint..

.hell no they wont foreclose

in order to do so they would have to pay off the first mortgage, which if its in the 100's of k,like most california houses its not financially feasible to do so

with the recent decline of the market if the house is worth less than what the first mortgage balance owed is, then they most likely wouldnt

it doesnt make economic sense to do so...

.we're not talking about paying off a first mortgage that is only around a 100k, like on a house in the rest of the country

your're most likely talkin bout 100's of k's

[jq26]

The original terms of the CDI set up the servicing agreement, which in general, gives the servicing company rights to act in any way they see fit in relation to collecting on the loan.

That is just a poor business practice and seems a bit far-fetched. Under general principal-agency law, a agent (servicer) has a fiduciary duty to act in the best interest of the principal (pool of investors). This is a clear breach of that duty by the servicer- even more clear cut because the self-interest nature of the foreclosure by the servicer is not just a duty of care issue but a breach of the duty of loyalty. I would think any sort of service agreement would include express terms of agency to be applied (I could be wrong, but that would seem so basic that anything less than that would open the door to malpractice suits).

[Methuss]

That is just a poor business practice and seems a bit far-fetched. Under general principal-agency law, a agent (servicer) has a fiduciary duty to act in the best interest of the principal (pool of investors). This is a clear breach of that duty by the servicer- even more clear cut because the self-interest nature of the foreclosure by the servicer is not just a duty of care issue but a breach of the duty of loyalty. I would think any sort of service agreement would include express terms of agency to be applied (I could be wrong, but that would seem so basic that anything less than that would open the door to malpractice suits).

I agree, but, unfortunately, that's really how it works. I should know, I've been through it. Servicer blatantly refused to reaffirm the Note in my chapter 7 bankruptcy, even though I could afford to pay at the time. As I later found out the fund manager was never even notified of my reaffirmation offer and my attorney and I were flat out told that they had no obligation under the servicing agreement to do so. Even after I came into a large sum of money and could afford to buy out the Note (my statutory right to redeem had expired), they still refused.

These funds where they pooled the mortgages and sold it off like stocks...do you really think the servicer puts it up for a vote of the holders of the shares (who are the actual owners)? Do you think the servicer even has a list of who owns all the pieces of a particular Note? Of course not. They don't know this information any more than a tea leaf knows the history of the East India Company.

So they act in what they deem to be the best interests (theirs) and the investors in the mortgage pool get screwed. The fund manager collects his percentage anyways and they book the loss. Personally I think the whole thing is a huge fraud, but thank the Presidents since Carter that allowed banking deregulation to get to this point.