Second mortgages are now starting to make their way into the ever-shifting foreclosure battlefield. As the housing market fell famously to pieces and took real estate values down with it, pushing scores of homeowners underwater, first mortgage holders were left holding the bag. That is if they had the only loan on the property. During the bubble that just visited the housing market home buyers often used a second mortgage to keep the down payment to a minimum, or nothing at all, and avoid paying PMI, or private mortgage insurance. 100% financing became quite popular those days.
When a foreclosure hits today, the second mortgage holder, or a debt collector who has purchased the second lien, often gets nothing at all because of the merciless erosion of home prices. The first may get something close to what the actual balance is in a short sale or as a REO sale. In the most affected areas during this downturn like Las Vegas properties frequently are way upside down and the first position gets pinched quite a bit, too.
Home loan providers and debt collectors who own second mortgages are beginning to hone their skills to grab something when a homeowner is in danger of a default. One of the new tactics they've come up with is get a judgment from a court to freeze the homeowner's bank account, or allow them to clean out the account altogether to satisfy their claims. The other one is to get a court to approve garnishment of paychecks.
This of course weakens a homeowner's position to seek loan modification. He is already struggling to make mortgage payments as it is and all of a sudden the paycheck is cut, or bank account frozen, that likely will negate a possible solution where he can keep his house. Moreover, now the first lien holder finds itself in a bind, too. The chance it had to salvage something out of this through modification is greatly diminished. It may now actually seek legal action of its own against the second mortgage holder, who essentially appears to be carrying out an end-run over the established foreclosure process.
Las Vegas valley - featuring communities like Henderson, Mountains Edge, Silverstone Ranch, Summerlin, Green Valley, Rhodes Ranch and Charleston Heights - homeowners ought to be aware of this possibility. There are scores of homes in here with second mortgages that are underwater and many could easily get snagged in this type of a game.
The property owner who is already in the weeds knee deep with mortgage payments could now find himself in the middle of a brewing lender duel. What a mess.