When homeowners are deeply underwater on their mortgages and also have a second mortgage or home equity line of credit, they might be able to negotiate with the bank holding the second mortgage. The resulting settlement occasionally comes to a fraction of the total loan, and it’s understandable for people to wonder why second mortgagee would be willing to agree to such a serious loss. Banks have their reasons.
The key point is that the second mortgage isn’t secured, so it’s likely easily dischargeable in a Chapter 13 bankruptcy in which the lien on the house will be removed as well. In a Chapter 7 filing, the debt is discharged but the lien on the house remains intact. This can still result in favorable negotiations with second mortgagees, but if debtors are willing to give up on the property, then filing Chapter 7 is a good idea because the second mortgagee is more likely to sue on the mortgage note rather than foreclose on the house. In different circumstances, i.e. if there’s any equity in the house, the bank will be far less willing to settle. One thing underwater homeowners may want to consider is appraising their house’s value so they can determine if the loan has any equity in it.
Another reason banks are willing to negotiate is they know that they will lose everything if the debtor’s house goes into foreclosure. Because they’re in line after the primary mortgagee, if a foreclosure proceeding begins, they know they won’t get the house, no matter what it’s worth. The house at least has some resale value for the first bank. Consequently, once a homeowner falls behind on a second mortgage on an underwater home, the bank knows it’s probably going to lose money. Sure, sometimes homeowners get a break and find a new job or get a raise, but that’s unlikely. Homeowners who are still current on their payments, though, are less likely to receive sympathy from lenders.
Ultimately, lenders will figure out which mortgages are high-risk and which are not, and they might calculate a settlement is worth getting only 10 to 15 cents on the dollar. Once the loan isn’t secured, the negotiating power shifts to the homeowner. Thus, consulting with an experienced New York bankruptcy attorney can result in a fair settlement or a Chapter 7 discharge, whichever debtors think is right for them.
For more questions about mortgage settlements, underwater homes, second mortgages, bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.
