By Mark Saiki
11/12/09 /
Strip Off Second and Third Mortgages. Homeowner has a first and second mortgage on a primary residence (Home). If the value of your house has fallen below the value of your first mortgage, and your second and third mortgages are “wholly unsecured,” then you may be able to strip off these mortgages from your house. This requires that a special motion be filed with the Bankruptcy Court and “not a drop of (home) equity” exists to secure these additional encumbrances.
Although this gray area of the law exists between the ambiguity left by two Supreme Court decisions, the majority and trend rule allows debtors to strip off, but not strip down, second mortgages.
There is a risk that if your certified market analysis or appraisal comes in low, and theirs shows equity, the Court will split the difference concerning the value of your house. There is a risk that the Court will decide to follow the minority rule. If the Court allows you to strip off these additional mortgages, saving your house might be much more affordable, by eliminating these second mortgage payments.
Because the speculative housing bubble burst, home values have been declining. This means that many second and third mortgages on residential houses may be stripped off under Chapter 13, because the value of the house has fallen below the balance of the first mortgage. “As of the second quarter of 2009, over 16% of homeowners had negative equity exceeding 20% of their home’s value, and over 22% of homeowners had negative equity exceeding 10% of their home’s value.”[1] Brent T. White, University of Arizona College of Law, “Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis,” Arizona Legal Studies, Discussion Paper No. 09-35, October 2009, 3.
In particular areas, home values have fallen substantially. “Again, however, the situation is worse in the hardest hit markets. For example, 47% percent of homeowners in Nevada had negative equity exceeding 25% of their home’s value, as did 30% of homeowners in Florida, 29% in Arizona, and 25% in California. Moreover, given the high median home prices at the peak within these markets, a large percentage of these homeowners are underwater by hundreds of thousands of dollars.”[2] Brent T. White, University of Arizona College of Law, “Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis,” Arizona Legal Studies, Discussion Paper No. 09-35, October 2009, 3.
Substantial losses in home values is confirmed on the national scene. “Freddie Mac CEO Richard Syron concluded, "We had a bubble", and concurred with Yale economist Robert Shiller's warning that home prices appear overvalued and that the correction could last years, with trillions of dollars of home value being lost. Greenspan warned of "large double digit declines" in home values "larger than most people expect."[3] Wikipedia, “United States Housing Bubble,” 2009.
Home values have fallen an average of six percent. “National home sales and prices both fell dramatically in March 2007 — the steepest plunge since the 1989 Savings and Loan crisis. According to NAR data, sales were down 13% to 482,000 from the peak of 554,000 in March 2006, and the national median price fell nearly 6% to $217,000 from a peak of $230,200 in July 2006.”[4] Wikipedia, “United States Housing Bubble,” 2009.
Foreclosures in your area can depress home sales. John A. Kilpatrick, of Greenfield Advisors, was cited by Bloomberg News on June 14, 2007, on the linkage between increased foreclosures and localized housing price declines: "Living in an area with multiple foreclosures can result in a 10 per cent to 20 per cent decrease in property values." He went on to say, "In some cases that can wipe out the equity of homeowners or leave them owing more on their mortgage than the house is worth. The innocent houses that just happen to be sitting next to those properties are going to take a hit."[5] Wikipedia, “United States Housing Bubble,” 2009.
When the housing market was good, second mortgages were secured and protected by the value of the property. Given the economic downturn, the bursting of the housing bubble, and the sheer number of foreclosed houses on the market, many second mortgages are now unsecured. They run the risk of being stripped off under Chapter 13. As a practical matter, most second mortgages will not bid at foreclosure sales, as they would have to pay cash to the first mortgagor, and then try to resell the property just to cut their losses. As a result, one Attorney on Debtors’ List Serve reported that, some second mortgage companies are offering to settle their claims. GMAC Mortgage dba ditech has written clients offering to settle 2d, now about $39,000, for > $3,200. A majority of states allow second mortgages to be stripped off under Chapter 13. A substantial number of second mortgages are being stripped off in those jurisdictions. In Colorado, as in other states, most of these lien strips go unopposed. In many cases, it is not worth the time, effort and expenses for these second mortgagors to buy at foreclosure sales or to oppose these motions to strip off liens.
Jim Spray (
Indeed I am still advising folks on mortgages (have been for 30+ years), including loan modifications- I still offer a no-cost 20/30 minutephone consultation. And we will work with a payment plan where necessary or I will adviseand then refer them to one of the HUD certifiedhousing counselors.
Heck, every now and again I even get to fund a mortgage or two. And yes, the banks are still dictating what will and what will not be. They have the key to the Treasury. So, why not?
Jim
James Spray, CCMB, 100008715
Mortgage Banker & Mortgage Broker
Mortgage Loss Mitigation Specialist
Licensed - Bonded - Insured
303.403.8168 Direct
"The Consumer Oriented Mortgage Broker "(TM)
Linda Spray
303.431.7574
Mark,
To make sure there is not a whit of equity, contact Linda Spray (my wife) for a Comparable Market Analysis on each property you wish to strip ajunior lien(s). She takes a holistic view as to valuing real estateas opposed to your rose colored glasses, sales oriented Realtors.
303.431.7574 Direct
James Spray, CCMB, 100008715
Mortgage Banker & Mortgage Broker
Mortgage Loss Mitigation Specialist
Licensed - Bonded - Insured
303.403.8168 Direct
"The Consumer Oriented Mortgage Broker "(TM)
Tell her that you are trying to strip off a second mortgage. Tell her the balance on the first mortgage, and ask to see if the CMA can be below the balance on the first mortgage.
1
[1] First American CoreLogic, Negative Equity Report (Aug. 13, 2009).
[2] First American CoreLogic, Negative Equity Report (Aug. 13, 2009). For example, a homeowner who bought a home in 2006 in Salinas, California, where home prices have dropped 70% from the peak, has on average $214,000 in negative equity. Luigi Guiso, Paola Sapienza & Luigi Zingales, Moral and Social Constraints to Strategic Default on Mortgages 2 (Nat’l Bureau of Econ. Research, Working Paper No. 15145, July 2009) Moreover, given that average home prices reached over $580,000 in Salinas at the peak, homeowners who bought even slightly better-than-average homes could easily have negative equity exceeding $300,000. The story is the same, of course, in other California metro areas, including Los Angeles, Modesto, El Centro, Merced, Riverside, and Redding. The situation is also dire outside of California. A homeowner who bought an average home near the peak in Las Vegas for example – where prices have dropped 52% - would likely have negative equity in excess of $120,000. The situation is the same in Miami where prices are down 48%, and in Phoenix, where prices have dropped 54%. Furthermore, with such significant price decreases in each of these markets, a large number of individuals who bought more-expensive-than-average homes have negative equity easily topping $200,000 to $300,000. Standard & Poor’s/Case-Schiller, Home Price Values for July 2009 (Sep. 29, 2009)(on file with author)
[3] "Subprime shockwaves". Bloomberg. 2007-07-19. http://www.bloomberg.com/apps/news?pid=newsarchive&sid=amTFyi_htQvI; "Greenspan alert on US house prices". Financial Times. 2007-09-17. http://www.ft.com/cms/s/0/31207860-647f-11dc-90ea-0000779fd2ac.html.
[4] Nancy Trejos (2007-04-24). "Existing-Home Sales Fall Steeply". The Washington Post. http://www.washingtonpost.com/wp-dyn/content/article/2007/04/24/AR2007042400627.html. Retrieved 2008-03-17.
[5] Howley, Kathleen (2007-06-14). "U.S. Mortgages Enter Foreclosure at Record Pace". Bloomberg News. http://www.bloomberg.com/apps/news?pid=20601087&sid=aLwz4ThaWzAg&refer=home.