Question: I bought a home in California in 2005. There is a first mortgage on the home with a balance of $250k and a second mortgage with a balance of $60k. Our home is now worth only about $150k, and that's on a good day. Over the past couple of months our business has not been doing to well and we have now missed a couple payments on our second loan. We have been reading many stories of other homeowners that were able to settle their 2nd loans for less than what is owed.
Should I negotiate a settlement of my second mortgage?
Answer: If you are considering trying a settlement on your second mortgage because you can no longer afford the monthly payments and you owe more than your house is worth, by all means go for it. But please keep in mind that they are very tough to settle.
In the recent past, there were some mortgage lenders offering settlements on these loans ranging anywhere from 5-50% of the outstanding balance. It seemed that lenders were well aware that because of our current financial crisis, many homeowners can no longer maintain two mortgage payments each month, and many like yourself are draining their savings just to keep up. However, times have changed and these same lenders have been playing hard ball with down on their luck borrowers.
Many lenders are now unwilling to work out a deal to settle these 2nd loans. The new method of operation by loan servicers is to charge this debt off and sell it to investors on the secondary market for the same price they could have settled with the current borrower.
But some borrowers are still able to negotiate successfully with their servicers or the new collection company. This is doable and you will need some good negotiating skills to manage this process.
One would think that since home values have dropped so much in value, that your second mortgage holder cannot collect any proceeds if your home went into foreclosure. Because of this, it would make perfect sense to secure the settlement, but that is simply not the case in this market.
Everyone is aware of loan modifications as they are still the number one solution to help an individual like yourself avoid foreclosure. However, you will soon come to find that a modification does not come with ease. The loan modification process has to be one of the longest and most stressful processes one will ever endure, especially when trying to modify a second mortgage. Because your second is typically a much smaller payment, and with a modification only lowering the interest rate, this assistance might not be enough to put you at ease.
Be aware that many 2nd mortgage holders may be willing to negotiate a settlement on the loan, especially if the loan is underwater. Since you have now missed a couple of payments this is the perfect time to submit an application for the settlement. The application process will be exactly like the modification application as you will have to provide your bank statements, paystubs, tax returns, and a hardship letter explaining the hardships that have caused you to pursue this option.
Generally, some lenders will work with you on a settlement once you start falling behind. But for some they will be stern to negotiate until he account is charged off and then sent to a collection agency. I would definitely suggest applying for the settlement with your lender, and if they do not assist you, start negotiating with the collection agency as soon as the debt is charged off.
You will need to come up with a fair price to offer your lender when applying, and this will need to be included in your hardship letter you send in. Most professionals suggest to start out with a low offer like 5% and slowly work your way up until you can negotiate an agreeable amount. We have seen many people able to settle these loans for as little as 10-20% of the outstanding balance.
I would also like to encourage you to join our free forum here on LoanSafe.org. We are a community of over 32,000 professionals and homeonwers alike. Here you will find all the tips and information you can possible need about trying to settle your second, or other strategies to help you prevent foreclosure, if it comes down to that.