Over the last seven years homeowners across America have endured extreme hardships due to the housing market collapse. This crisis has caused foreclosure rates to skyrocket and has left many people unable to pay their mortgage and other debts they’ve acquired. This is especially true for borrowers who have obtained a second mortgage loan or home equity line of credit (HELOC). Many homeowners have obtained this loan through a refinance while the market was booming and home prices were sky high.
As we have come to realize the market was “under the influence” and property values were way over priced. A property worth nearly a $1,000,000 back in 2006 may be found on the market now for only $700,000 – on a good day. Homeowners who took advantage of home prices and used their equity to take cash-out have found themselves in a negative equity (i.e. underwater) position.
Many people are aware of loan modifications as this is the number one solution for borrowers who are struggling to pay their mortgage. However, a loan modification is extremely difficult to accomplish on a second mortgage or HELOC and many homeowners are left in the dark. Since a second mortgage is usually minute compared to a first mortgage, there’s not always much the lender can do besides lowering the interest rate, which in many cases will not help lower the payment much at all.
What you need to know is that the second mortgage servicer (more often than not) is in a precarious position. With them being in 2nd lien position (given the home is underwater), they would not gain anything from foreclosing on the borrower in case of default. For homeowners who are current on the 1st mortgage, this places you in a “GREAT” negotiating stance to work out some type of settlement or short pay. Many homeowners are unaware that underwater junior liens can be settled for pennies on the dollar.
To start with, if you intend to keep your house and cannot afford to keep paying both the 1st and 2nd, your priority is to keep your 1st current. An important and generally accepted rule is this. A property owner should not deal with his/her 2nd lender until after the 1st loan has been permanently handled.
Your 2nd lender, often being totally underwater, and hence “out of the money” won’t foreclose. So, forget about your 2nd for a while, e.g. at least 6 months, but almost always much much longer. Here’s the deal. Should you want a reasonable settlement, you’ll need to follow a certain strategy. If you try to play by the lender’s rules, you may be able to settle sooner, but you will pay a lot more. If you have a good reason to be in a hurry (“just to get it done and move on” isn’t a good reason), then by all means reach out to your lender, but be prepared to jump through hoops, and to ultimately pay a lot more. However, to achieve a more palatable settlement, the process will require a smart strategy and patience, as it will most likely be a process lasting, at a minimum, six months, but often as long as several years.
Key settlement guidelines:
1) First, stop paying on your 2nd loan and have no more communication with them, by either phone or mail. That’s right. When you see your lender’s collections dept on your caller ID, do not answer the phone, and do not return any voicemail messages. The first three or four months, you’ll likely receive many calls from the lender’s collections dept. Please just ignore them. FYI, many forum members have learned how to deal with lots of incoming collections calls from all sorts of creditors. You’ll figure out what’s best for you.
2) It’s irrelevant whether your lender charges off and/or sells your 2nd/HELOC to a debt buyer or not. Makes no difference whatsoever, so ignore it. If, in fact, the debt is sold to a new entity, and you receive a letter from the new owner, DO NOT bother sending a debt validation letter. It accomplishes nothing for you, does not affect your legal standing, and is generally a waste of time and effort. Plus, it signals to the debt owner that they have the correct address, and that you, as a debtor, are concerned, stressed, and naive enough to send it. BTW, a new debt owner is required, under the provisions of the FDCPA, to send a letter to the debtor advising them, among other things, of their right to have the debt validated. Means nothing, so forget about it.
3) When, eventually, you engage in settlement discussions with the lender’s recovery department (no, not the collections dept), you will most likely be asked some prying questions, and be asked to disclose financials. Politely refuse to discuss these. DO NOT disclose any personal info, to include your plans, and absolutely no financial or employment info. One member posted that his attorney quipped that giving financial info to a creditor is akin to “pre-judgment discovery.” A creditor doesn’t need that stuff in order to make you an offer. As the oft repeated maxim states, “knowledge is power.” And, as in the following humorous age old buyer-seller exchange. Buyer (Borrower): “How much do you want?” Seller (Lender): “How much you got?”