Do you have a 2nd Mortgage? Important Info for California Homeowners!

[Maurice Bedard]

California homeowners have been making the “refinance mistake” as long as the bubble has been going on. The big mistake homeowners make is turning a ”non-recourse” second loan into a “recourse” loan by refinancing it.

A non-recourse loan is a loan that the bank can only look to their secured interest. In other words, they can only foreclose, they cannot get a deficiency judgment and chase you into bankruptcy collecting it.

THIS IS HUGE! You can walk away from a non-recouse loan.

So how is a second mortgage a non-recourse loan? Simple, it was “purchase money” for your home. A purchase money loan is one where the money went from the lender, to escrow, and then to the seller or to pay purchase closing costs. In California purchase money loans made on your home (note: not second home or investment properties) are non-recourse.

It’s simple as that.

The mistake comes when you refinance your second purchase money mortgage. Because it is no longer a “purchase money” loan a refinance transforms it into a “recourse” loan. That means the lender will chase you into bankruptcy collecting it. Or worse, they will sell it to a debt scrounger, the worst form of debt collector. Your life will be hell if it falls into their hands.

It used to be second mortgages were never purchase money. Enter the housing bubble and creative Wall Street financing. The result: the 80/20 loan. It was really a beautiful thing. Buy a house with no money down, get two loans, a cheap interest rate first covering 80% of your loan, and a high rate second mortgage covering the 20% you were supposed to put down to have some skin in the game. Wall Street sold the loans to different investors and bought insurance on the second to cover the higher risk of default.

But there was an unintended consequence Wall Street seems to have overlooked. The Purchase Money Rule made these loans “non-recourse.” This has come back to bite. It turns out ETRADE has a bunch of California Second Mortgages. Guess what? They are unsecured now because housing prices have fallen so much, and there is no recourse against the borrowers. They can just walk away-AND THEY ARE.
A couple of tips:

1. You can refinance your first mortgage or both mortgages into one mortgage and still be “non-recourse.” This is because the One Action Ruleprevents lenders from looking beyond the mortgage in a non-judicial foreclosure. Second mortgages do not benefit from this rule because they have not had their “one action.”

2. If a seller took a second loan on your property, they cannot look beyond a foreclosure even on investment properties or second loans. This is the “Vendor Rule.”

3. Always keep economics in mind. It’s better to let your home go and walk away without liability to the bank then to try to save your home with a refinance and become personally liable.

Source www.SanDiegoPredatroyLending.com

[mochalover]

I'm just asking for confirmation, this only applies to those in California, right? I live in Michigan. I have an 80/20 also and was told today by EMC (who I have HELOC with) that these loans are not being modified. Then I was told to call back tomorrow because someone else in her department said that might be changing. I sure would love just a little consistency!!

[Maurice Bedard]

I am not sure if this would apply in Michigan but I am sure that there might be a similar law.

Keep in mind that the second mortgage is never in a good position and that it ie definitely in their best interests to modify your loan. Hopefully you will hear good news soon and some consistency.

[sherry]

I Am Banned

[mreedlaw]

I am thinking that the posting of a link above might be a no-no...

[erj041108]

Moe, I am a little bit confused here. Please help. We purchased our house in 2005 in So. California for 475K. We took out 80/20 loan (360K/115K purchase money) . We refinanced our second and took out additional 15K. We are now 200K underwater. If we are going to short sale the house, are we going to receive 1099 from our second and debt cancellation with our first? Are we still qualified with the Mortgage Forgiveness Debt Relief Act?

[Mary Salzer]

I will let Moe post the verbiage, but to be sure you really should hire an attorney for about 2 hours and determine your situation....preferably an attorney with a CPA as well as a JD.

[CW California]

Moe
I purchased my home on an 80/20. The 20 being a Heloc adjustable rate. When the value on my home went up I refinanced it to a fixed rate and I took no additional money. I lost my non-recourse protection when I did that didn't I?

[ayokoremata]

hi moe,

i'm a little bit confuse in my case. i purchased a condo last april 2004 on an 80/20 5 yr adjustable loan. after about 3 years while i still have a little equity, Chase which is my 2nd mortgage bank offered me to cash advance against my little equity in the amount of 15K. does it automatically turn my non-recourse loan with them to a recourse?


thanks in advance,

ayokoremata

[matteoroe]

okay, okay, I am CONFUSED also here.... MOE help! I have read these above post and I have a similar situation:

1. We purchased a condo 8/2005. Purchase price $320,000
2. Did a 80/20 loan.
3. About 2 years into the loans refinanced both 1st & 2nd.
The 1st was a adjustable put it to a 30 yr fixed.
The 2nd was HELOC at a 10% rate. Put it into 15yr,
amoritized over 30yrs with a balloon payment due in 15yrs.
4. No money was taken out, all fees were included in the loan.
5. I live in California.
6. The value is now $147,000.

Can the 1st & 2nd mortgage come after me if I walk?


Thank you!

matteoroe

[caldwell02]

Hi - question on the second. What if you just stop paying the second while you're trying to get a mod? But you still pay on the first? I'm in CA. The house is worth less than the first mortgage. What do you think? I could squeeze in another couple months of paying the first, but not both.

[matteoroe]

I am thinking I will be going behind on my 2nd mortgage this month. I am in the same boat. I can't even squeeze another few months of paying on both. I just didn't want to take the risk of trying to get a loan mod (principle reduction) on my 1st if being late on my 2nd would effect it?

Thank you!

[art4ari]

Hi MOE! thanks for the info.

I refi 3 years ago and a second small loan was set up to pay for closing costs. I am assuming is a non recourse debt. But It has been sold to a collector agency who are trying to get me. What to do? its 10k. Will they chase me if my first is modified?

[bubba300]

Hi Moe,

How do I know if my 2nd is a non-recourse loan, it is a 15 year conventional fixed balloon both the 1st and 2nd are with GMAC.

Thanks

[caldwell02]

I just got behind on both, but I'm going to try to pay my first before 10/1, to stretch this out. I'm not paying my second till I can get the whole thing modified. Taking a chance, but of course by this time - 9 months into it where I paid IN FULL for the first 8 - I really don't see any other way. I could pay the second - it's $565, but it seems stupid to pay it since my house is worth less than the first and it's the first that is more likely to foreclose - at least in the short term - because if they did and the house sold it would sell for less than what I owe on the first. That makes me wonder - who pays the foreclosure fees? is it the servicer or the lender? My first is owned by Deutsche but serviced by Chase; the second is owned and serviced by WaMu/Chase.

[TeresaDLT]

Hello-- PLEASE HELP

Our home was purchased with a 80/20 loan, never refinanced but now that we were foreclosed on the lender which was the same owner of the 80/ loan, is coming after us, calling and demanding payment... Will they continue to do this and for how long and can't this be forgiven along with the 80/ loan? please advise,,

what steps will i need to take to dissolve this loan?

[pookey]

Hello-- PLEASE HELP

Our home was purchased with a 80/20 loan, never refinanced but now that we were foreclosed on the lender which was the same owner of the 80/ loan, is coming after us, calling and demanding payment... Will they continue to do this and for how long and can't this be forgiven along with the 80/ loan? please advise,,

what steps will i need to take to dissolve this loan?

Hire an attorney for a couple of hundred dollars to write a letter explaining the non-recourse status of your /20 loan. These collection people don't do any research they just assume they are recourse and go after them.

[cyril1]

Second mortgage loans are loans that are made in addition to the first mortgage, and it is usually based on the amount of equity that the borrower uses to build into his home. Usually it is required to fund home renovations.

[Do_the_math]

Hey Moe,

My client had a foreclosure 3 years ago, but the purchase money closed end second that closed currently is showing a balance. Not only is it showing a balance, but is being reported as 3 different accounts- one is a collection agency.

While I know this is standard for equity seconds, I'm confused why the 2nd is showing a balance when it is non-recousre. If it was an equity line or 2nd that was refinanced, I would expect it. However, the effect of reporting a deficiency balance is an attempt to force the borrower to pay- and gives the impression to lenders that the debt is enforceable.

If the purchase money first can't report an outstanding balance after the foreclosure extinguished the debt and the lien, why can the second?

Would really appreciate your input.

Krista