Is it Smart to Pay on that Second Mortgage if Your Home is Underwater?

By
Real Estate Agent with RE/MAX Gold DRE #00697006

If you own an underwater home, should you continue to pay on your second mortgage? Lots of people stop paying, and they don't worry about it. Why don't they worry about it, you may ask? Because the second mortgage holder probably has zero equity. Nada. No security for that loan. If there is nothing securing that loan, the mortgage lender is unlikely to file for foreclosure because there is no financial gain to do so.

When a second mortgage lender files for foreclosure, to perfect it, the lender needs to make up the back payments to the first lender, if any, and take over the first loan after foreclosure. Lenders will do this if there is equity; however, if the first mortgage is underwater, too, who wants the house? Not the second, that's a given.

Let's say you paid $500,000 for that home in Elk Grove, California. You financed it through an 80 / 20 combo loan, which was so popular in 2005 and has pretty much vanished today from the face of the Earth. So, you took out a $400,000 first mortgage and a $100,000 second mortgage. Today, that home might be worth $225,000, if you're lucky. Go over to Zillow and check the value of your home.

If you short sale the home, you get rid of $500,000 worth of debt, give or take, and, relying on your real estate agent for information, you may wrongly assume the bank will release you. After all, these are purchase money loans that carry no recourse in the event of foreclosure, as any California real estate lawyer will tell you. However, you may not realize that foreclosure and short sale are two different animals.

When you do a short sale, lenders retain certain rights and, depending on the verbiage in the short sale approval letter, a lender could retain the right to go after you. That's right, in California, banks have 4 years to pursue a deficiency judgment after agreeing to a short sale -- if you didn't get released at the time.

That's why you should always get legal and tax advice before pursuing a short sale. And choose your Sacramento short sale agent with care. Agents can't give legal advice, but hopefully your short sale agent obtained a release of liability for you and directed you to a lawyer who could explain your legal obligations. There are a lot of agents hanging out that short sale shingle in Sacramento, so you've got to be careful. We are not all the same.

In closing, don't take this piece of information as carte blanche to stop making mortgage payments on your second mortgage, as I am not advocating anything -- get legal advice. People who stop making their mortgage payments could lose their homes. I'm just sayin'.

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elizabeth weintraub

 

 

Weintraub and Wallace Realtors

 

 

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Elizabeth Weintraub is co-partner of Weintraub & Wallace Team of Top Producing Realtors, an author, home buying expert at The Balance, a Land Park resident, and a veteran real estate agent who specializes in older, classic homes in Land Park, Curtis Park, Midtown, Carmichael and East Sacramento, as well as tract homes in Elk Grove, Natomas, Roseville and Lincoln. Call Elizabeth Weintraub at 916.233.6759. Put our combined 80 years of real estate experience to work for you. Broker-Associate at RE/MAX Gold. DRE License # 00697006.

Photo: Unless otherwise noted in this blog, the photo is copyrighted by Big Stock Photo and used with permission.The views expressed herein are Weintraub's personal views and do not reflect the views of RE/MAX Gold. Disclaimer: If this post contains a listing, information is deemed reliable as of the date it was written. After that date, the listing may be sold, listed by another brokerage, canceled, pending or taken temporarily off the market, and the price could change without notice; it could blow up, explode or vanish. To find out the present status of any listing, please go to elizabethweintraub.com.

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Topic:
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California Sacramento County Sacramento
Groups:
California Short Sales, REO's, and Foreclosures
Posts to Localism
Short Sales Specialists
Lyon Realtors
Legal Aspects of Short Sales, Foreclosures, Loan Mods
Tags:
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foreclosure
elizabeth weintraub
short sale
purchase money loans
sacramento short sale agent
underwater home
stop making mortgage payments

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Rainmaker
427,439
Leslie Ebersole
Swanepoel T3 Group - Saint Charles, IL
I help brokers build businesses they love.

I always learn so much when I read your posts, thanks.

It's helpful to know what happens in CA since it's such a large state and because so much is written about how shorts and foreclosures are handled. When one of our clients says "x, y, and z" we can say "that's California, it's different here in this way".

Mar 23, 2011 02:57 AM #1
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1,878,578
Gary Woltal
Keller Williams Realty - Flower Mound, TX
Assoc. Broker Realtor SFR Dallas Ft. Worth

What a mess not only with an underwater value home Elizabeth but two mortgages. Some people think the deficiency judgment now is a badge of honor. As long as they can get away from this MESS they are ultimately happy. It is a sad story actually all around.

Mar 23, 2011 03:46 AM #2
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Chris Ann Cleland
Long and Foster REALTORS®, Gainesville, VA - Bristow, VA
Associate Broker, Bristow, VA

There is no substitute for legal and tax advice when a person is selling their home short.  So many things to consider.  And the more trusts, the more complicated it gets. 

Mar 23, 2011 05:33 AM #3
Rainmaker
2,189,557
Elizabeth Weintraub Sacramento Realtor Top 1%
RE/MAX Gold - Sacramento, CA
Put 40 years of experience to work for you

Hi Leslie: Well, a lot of people don't know that nobody is forcing them to pay the second lender; we have no underwater home police, and that the second lender is unlikely to do anything if they don't get paid. I know some people who haven't paid their second lender for years.

Hi Gary: For some, not making a payment on the second allows them to put food on the table. Our unemployment rate is more than 12% in Sacramento.

Hi Chris Ann: I see you call them trusts on teh East Coast. We're a little more formal here and call them trust deeds.

Mar 23, 2011 08:49 AM #4
Rainmaker
644,989
DeeDee Riley
Lyon Real Estate - El Dorado Hills CA - El Dorado Hills, CA
Realtor - El Dorado Hills & the Surrounding Areas

Great information here for sellers, Elizabeth (and agents who don't know these things like they should!).

Mar 23, 2011 05:02 PM #5
Rainmaker
414,602
Tni LeBlanc, Realtor®, J.D.
Mint Properties, Lic. #01871795 - Santa Maria, CA
Tenacious Tni (805) 878-9879

Elizabeth,

I just got a report from a person in CA with a purchase money BofA 2nd who went through a foreclosure and BofA will not issue a 1099-C to them -- in fact when they contacted BofAs executive office, they said their policy was to never issue a 1099-C on a second after foreclosure.  Very interesting -- because as a practical matter they may end up having to hire an attorney to fight BofA on this.   

Also, I met at least two people in the last 3 months who were given legal advice to "just walk away" from homes where they had a non-purchase money seconds and they were both still being pursued by BofA years later.  In both cases, if they had dealt with the matter with a short sale and received a full waiver of deficiency as a part of that short sale, they would not be looking at bankruptcy now -- and they would already be in the position to buy a home again.

As you indicate, getting good legal advice is vital when contemplating a short.  I still believe that a short sale is a better avenue for most underwater sellers than foreclosure, it gives you an opportunity to deal with your lenders and work out an acceptable deal and get it in writing.

Great blog - I was just about to write a blog on the topic of HELOCs.

Tni

Mar 27, 2011 04:56 AM #6
Rainmaker
2,189,557
Elizabeth Weintraub Sacramento Realtor Top 1%
RE/MAX Gold - Sacramento, CA
Put 40 years of experience to work for you

I don't know why a seller would want a 1099 but I can understand why Bank of America might not want to issue it.

Mar 27, 2011 05:42 AM #7
Rainmaker
414,602
Tni LeBlanc, Realtor®, J.D.
Mint Properties, Lic. #01871795 - Santa Maria, CA
Tenacious Tni (805) 878-9879

Homeowners who have gone through foreclosure or a short sale are being advised that if they receive a 1099-C that the debt is cancelled.  I don't think that it is a settled area of the law -- but that is the advice that they have come back with.  It is not a guarantee but I do think if the bank is unwilling to issue one it is a bad sign.  Of course, homeowners in that situation have to get legal advice. 

I do think if the bank doesn't issue a 1099-C on a second they are probably planning on pursuing.  Just my gut.  I'd rather deal with a 1099-C.

What do you think? 

Mar 27, 2011 05:58 AM #8
Rainmaker
222,058
Jirius Isaac
Isaac Real Estate &TriStar Mortgage - Kenmore, WA
Real Estate & loans in Kenmore, WA

I have a client right now that is getting foreclosed by the 2nd.  There seems to not be enough equity, but I think they are just trying to prevent some loss, but who knows.  It makes no sense to me.  Have you experienced an actual 2nd foreclosure?

Jul 24, 2011 12:40 PM #9
Rainmaker
2,189,557
Elizabeth Weintraub Sacramento Realtor Top 1%
RE/MAX Gold - Sacramento, CA
Put 40 years of experience to work for you

Hey Tni: I think a 1099 is not proof that the debt was discharged. I think it is proof that there was an unpaid deficiency.

Hi Jirius: A 2nd foreclosure when there is no equity? No, because it doesn't make sense. In situations like that, generally the 2nd has to make up all of the back payments due the first lender and then pay foreclosure costs in hopes to recoup some of that investment. If there is nothing to recoup, what's the point? Well, unless there is insurance. Maybe it's lender-paid MI?

Jul 25, 2011 03:05 AM #10
Rainmaker
414,602
Tni LeBlanc, Realtor®, J.D.
Mint Properties, Lic. #01871795 - Santa Maria, CA
Tenacious Tni (805) 878-9879

True.  Glad the law changed in CA recently.  

But, I am already getting a bad reaction from second lenders to it. 

I hope borrowers come out ahead on this one but it is TBD.

Jul 25, 2011 04:45 AM #11
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