I've researched this a little bit but still need clarification:

If someone successfully modified their first mortgage, then their second mortage gets sold to a collections agency,

Will their house still be foreclosed or is the second mortgage now treated as a secured debt (like a credit card debt in collections) since the "bank" doesn't own the debt anymore?

Its a family member that owes about $49k on the second mortgage.

Thanks anyone for some information.

Depends on the state that you are in. Basically, the second mortgage is second position on a loan. If someone defaults on their second mortgage, that lender has to petition the first mortgage to foreclose as well in order for them to collect their money. 99% of the time the first lender is going to say no because they will probably end up in less money than just keeping the mortgage going.

This leaves the second lender in a position where they will have to try to come after the borrower through normal collection methods. They have to collect like an unsecured debt. They never lose their second position so they will still have rights to collect on that home based on the note and mortgage.

Yes 2nd mortgage can foreclose.

Hi Joe,

The second lien holder can foreclose and will if they think there's equity in the home. If there isn't enough equity because of values dropping, then they may hold off and just send letters or call.

If your 2nd mortgage has become "unsecured" from lost value in the home, you may be able to negotiate a buyout for pennies on the dollar.

If they don't do anything now, and just sit and wait for the market to recover, they will at some point start perusing what is owed to them even if it takes years.

Hope that helps, good luck.

Thank you all for the information. Hope this thread also helps other people out there with a similar situation.

I'll post back here with updates on their situation with the now collected 2nd.

One option i've suggested to them is a ch13 since they've successfully modified the first. I'm almost 110% sure there's no equity in their home, but i'm unsure if they'd meet the means test for a bk. The husband is retired, the wife is working...I'll have to ask them if their debts justify a ch13.

I figure if they're in a financial situation where they aren't even up to date on their other debts, possibly a ch13 would relieve some pressure....then again, they'd have to pass the means test first off.

(I'm thinking out loud and painting a picture for anyone else that may see this as an option for themselves)

Thanks again everyone.

In a BK 13, it is designed to protect assets and settle outstanding debts. There is a good chance, in filing for BK (either chapter) they could lose their home. This is especially true since they will not be paying on their second.

I am an RE investor and both times I have seen clients file bankruptcy they have lost their primary homes because there was no equity and they could not afford the current mortgage.

I am not an attorney, so I believe they should seek counsel.

Good Luck!

Thanks shubbardman, very good points. I know a good attorney locally that will be able to help them out. Will be back with updates.

You can modify a 1st and still have the 2nd as it was originally.
It doesn't automatically follow that a modified 1st makes a 2nd sold of to a collection agency.
The latter can happen in the case of a HELOC when one doesn't pay anymore. By law banks have to charge off loans after a certain amount of time.
Of course they could pursue foreclosure too, but if the house is so much underwater that they would be wiped out in foreclosure they're not going to really go that route.


A HELOC (home equity line of credit) can become decoupled from the house and become unsecured. It's one of those hybrid animals that survives much like a credit card. Think of it as a barnacle that's stuck to a ship. You can remove it but it still alive.

That's all that comes to mind right now.

Correct, the 2nd mortgage holder can claim that there is insufficient equity to protect their lien and force foreclosure.

The key risk with the 2nd is that they will take some court action that gives them a right to an income stream from the homeowner (wage garnishment being the biggie) and that the borrower will no longer be able to stay current on the first.

A Chapter 13, likewise can be helpful in that it will "strip" the second (making it unsecured) but 60% of CH 13 plans fail, which will mean the borrower will likely lose the home.

A Chapter 7 will let you keep the home only if you remain current on both 1st and 2nd mortgages.

The "means test" only means that if you make too much money you can't use Ch 7 and must use Ch 13.

I think I've only ever seen one second that actually wanted to foreclose on a home -- which to me was suprising. Seldom do 2nd's ever foreclose right now...

"Right now" being the operative phrase. Most 2nd mtge holders have no chance in recovering their principal loan balance and many can't zero sum their total payments received (monthly payments + foreclosure recovery). Those that do want to foreclose are taking a beating but some want to flush out their toxic loans so to get on with life (after recession).

There's a saying around here..In the mortgage industry things are changing on a daily basis..

All it takes is for a home or two on a street to short or bank REO sale, or a desperate home owner who wants out now at a low-ball # and values go to hell in a handbasket for blocks around. With inventories up (in most markets), most buyers are buying only at the free fall #s. Good idea because somewhere at that number is where "market" is. Until all those flush out, there is no rebound.

Is that every subdivision? No, some are holding values quite well such as homes where the wealthier live, those who didn't max out their inflated home values with debt and there aren't shorts or bank REOs. They are kinda sitting waiting for the market to turn or they may have no intention to sell at all.

OTOH I am looking at three identical 2100 sft houses built in 2007 on a golf course that the developer has walked off of and the prices range from $350K to $750K.

None are selling, all have been on the market for two years or more. The $350K is sick and can't believe it, they bought at $700K. I told the Sick Doctor that I had no idea what price point would work but his house could be rebuilt for $300K so try lower than that.

He hung up.

Obama created a program to deal with second mortgages, but after nearly a year it appears the banks are eschewing it.


http://www.huffingtonpost.com/2010/01/08/n...a_n_416884.html

May I ask what it was called? I didn't know he created one...Tho I don't work in HELOC.

"second lien program", part of the Making Homes Affordable act. It's supposed to automatically modify the second when the first is modified.

I could see why nothing has been done - there still trying to get the kinks out for first liens. I would imagine tho this year that you will start seeing a lot more modifications..Servicers will start getting there act together. I know here at IndyMac you will soon start seeing applying and while on trial plans being a lot more easier and being able to keep up with the status better.