Second Mortgages Give Banks a Back Door to Foreclosure, Despite Settlements

February 28, 2013

Although some big promises were made in the wake of a $25 billion foreclosure abuse settlement agreement reached last year between 49 states attorney general offices and the five largest banks in the country, our Miami foreclosure lawyers were always skeptical. reflection.jpg

Another $8.5 billion deal reached earlier this year with 10 mortgage servicers - also for foreclosure abuse - was intended to accomplish much of the same: compensate borrowers who had wrongfully lost their homes and reduce monthly payments or principal to keep people in their homes who were in danger of foreclosure due to reckless lending practices.

But when we look at the initial results of that $25 billion deal, we can't help but be discouraged for what this new settlement - and any others to follow - might accomplish.

The goal was always supposed to be simple: Save homeowners from losing their homes unnecessarily, and offer retribution to those who had already suffered that loss.

The banks have pretty much failed miserably.

First of all, banks have been slow to enact any sort of modification when it comes to first mortgages, nor have they with any consistency forgiven principal on underwater homes.

Instead, banks have been exploiting a loophole in that deal to push distressed homeowners into a short sale. This is a foreclosure alternative - and not always a bad one - in which an underwater homeowner will sell the property for less than what they owe, and the bank writes off the rest. Again, this isn't always an awful deal for homeowners, but the problem is that such transactions harm your credit and allow the bank to avoid it's primary, agreed-upon responsibility: Keeping people in their homes.

Secondly, the deal has actually done very little to slow the roll of foreclosures in the U.S. And this is why: Second mortgages. These are loans that millions upon millions of homeowners took on at the height of the bubble. In fact, some economists have speculated that roughly 25 percent of all mortgage debt in this country is actually comprised of second mortgages. Some of these were for home improvements, but mostly, they were subprime loans known as 80/20 mortgages. They were called this because 80 percent of the cost was covered by an adjustable-rate first mortgage, while the other 20 percent was covered by a higher-rate second mortgage.

Here's the catch with the government settlement: The banks actually get CREDIT when they forgive that second mortgage. In other words, forgiving the second mortgage gets them closer to their goal of fulfilling their settlement obligation. So banks are doing this, a lot. What they aren't doing is helping people with their first mortgage, which is the one that matters when it comes to whether or not you can keep your home.

In fact, when homeowners lose their homes after having their second mortgage forgiven, but not their first, it actually works out to be quite a deal for banks. When a house goes into foreclosure, the home will be sold at auction and the bank will recoup a portion of its losses. But when it comes to the second mortgage, the bank won't get anything back in a foreclosure - unless they forgive it, per the settlement rules. Suddenly, they are getting a "modifying" credit from the government toward that billion-dollar payment they owe - and they get a lump sum payment from the actual foreclosure.

So at the end of the day, this settlement that was supposed to protect people from losing their homes? They're still losing out.

Just to give you an example, The New York Times recently reported that in New York state, during the first six months after the settlement, the number of people receiving second-mortgage forgiveness was three times as high as those receiving first-mortgage modifications (about 3,000 to about 1,000). The settlement credit that banks are getting - just in that state - come in at about 40 percent for second-mortgages and about 18 percent for first mortgages.

All of this illustrates why, if you are in danger of losing your home, you need to consult with an experienced Miami foreclosure lawyer before accepting any deal extended by the bank.

If you're battling foreclosure in Miami or the surrounding areas contact Bruce Jacobs & Associates for a confidential appointment to discuss your rights. Call (305) 358-7991. Also, don't miss Miami Foreclosure Attorney Bruce Jacobs on 880AM/the Biz, every Wednesday from 5 p.m. to 6 p.m. on "Mortgage Wars," discussing foreclosure topics that matter to YOU.

Additional Resources:
The Second-Mortgage Shell Game, Feb. 17, 2013, By Elizabeth M. Lynch, Opinion, The New York Times

More Blog Entries:
Miami Foreclosure Lawyer: RMBS Task Force Needs to Get to Work, Feb. 22, 2013, Miami Foreclosure Lawyer Blog