STRATEGIC DEFAULT ANOMALY: Borrowers Continuing Payment on 2d Mortgage But Stopping on 1st Mortgage

COMBO Title and Securitization Search, Report, Documents, Analysis & Commentary COMBO Title and Securitization Search, Report, Documents, Analysis & Commentary

see Good Comments Below from Readers

Many thanks to Simon Johnson at www.baselinescenario.com for pointing out this apparent anomaly. While more and more people are exercising their option to strategically default on the first mortgage either intentionally or because they can’t make the payment, a rising number of second mortgages and HELOC’s are current relative to defaults on 1st mortgages.

I’ve confirmed Johnson’s observation but I can only offer conjecture at this point as to why this is the case. The number of contested issues relative to 1st mortgages is also rising sharply as people become more aware that they DO have defenses and even counterclaims. It might be that they are gambling on beating the 1st mortgage down in principal through settlement or getting rid of it altogether as an encumbrance on the property.

If the court’s agree with our analysis here, those mortgages are going to be declared unenforceable or even void as securing a non-existent obligation — the real obligation having escaped being committed to writing because the note contains so many discrepancies with the facts that it fails the test of being evidence of the obligation that arose when the borrower purchased or refinanced the home.A simple lawsuit to quiet title would raise this issue properly and during discovery it would be apparent whether the party claiming 1st position actually has anything to back up their position.

This would put the second lienholder in 1st position, and the strategy could be that that the borrower and the second lienholder might have a joinder of interests in maintaining the position that the 1st mortgage is void. The context of litigation would change to institution vs institution and those cases where the second lienholder challenged the 1st lienholder seem to indicate a willingness for even the highest courts in the land to simply apply the law without regard to politics — meaning the second lien-holder is winning these arguments.

The homeowner would be left with only one encumbrance on the home which now could be subject to the same challenges depending upon the facts. But the small size of the second lien might be enough for homeowners to accept those terms and execute any documents necessary to validate that mortgage and clear title without the necessity of a quiet title action. In a new world where bets against the interest you bought or sold became commonplace and profitable, this would make sense. But it is hard to see how so many homeowners would possess that level of sophistication.

I invite comments here.

OK Here is one from Joe that makes sense:

I wonder if this has something to do with the HAMP program. If the servicers are telling people that they have to stop paying their mortgage in order to be eligible for HAMP, and the mortgages at issue are mostly first mortgages, then you might be seeing people defaulting on the first mortgage for that reason. Since the homeowner is otherwise making payments on both mortgages, but only defaults on the first because of the advice of servicers, then that might explain the irrational move of defaulting on the first and not the second.

And here is another from Bob G.

Nope. Here’s the real deal. See the webcast below, especially the part where the nerdy female economist shows what’s really happening with the seconds vs the firsts. Bottom line: banks holding tens of billions of seconds on their balance sheets, and are screwing over the holders of the firsts, so as not to have to take the losses on the seconds. See for yourself. http://www.mortgagemag.com/news/2010/1016/1000021907070.htm

See also stuff at this link: http://www.securitiesdocket.com/2010/11/

And from Bruce from Oregon

With penalties and interest we are now about 27,000 behind on our first mortgage, but we are keeping our second mortgage less than 90 days delinquent. Our second mortgage HELOC with BOA is on a plan currently below 2%. As far as I know the loan is not securitized but held by BOA which has made concessions to help us stay current. The first mortgage is headed for a show down one day we know, but we have fended them off with forebearance and loan mod offers. When a notice of trustee sale, 43 identical copies of Notice of Trustee Sale were mailed certified mail to us, I wrote with a red sharpy on everyone “REFUSED FOR CAUSE” and attached a letter asserting that a modification agreement had already been reached between us and the servicer and that they had better check with them before they wrongfully foreclosed and became liable for damages. They rescidned the notices not once but twice.
Since then a letter to the servicer was sent saying that we are ready to cure the default as soon as they could provide documentation showing who the legally assigned owner of the note was. They had previously sent a copy of the note with no endorsements except an illegible stamp of some kind. We acknowledged that we still could not determine who the creditor is and please send us proper documentation so we can cure this default immediately. The servicer has not responded in over a month.
The funny thing is BOA is also the alleged trustee for the securitized MERS bundled up loan. So if BOA forecloses on the house for the 180K on the first, the 145K on the second will default, but if the first in unsecured by fraudulent mishandling, then they still get to keep the second without a fight.
We can afford to pay our second and since it is a line of credit, it may help us to rebuild our credit or at least give us a banking option since we no longer have credit cards or even a checking account.
BK is also in our future most likely, but the second mortgage may survive that as well.
Finally, in response to the question, why, it is easier to deal with one problem than with two since either encumbrance has right of sale in the contract.
Wish us luck, Still looking for the right lawyer.
Bruce

28 Responses

  1. Reply to Sal

    In California, the 1st is often recourse also. Only the ORIGINAL loan used to PURCHASE the house is non-recourse, i.e, a purchase money loan. Any refi of a 1st becomes “recourse”, i.e, any time equity, over and above the original purchase price, is taken out, the loan becomes “recourse”.

  2. The reason they are paying their 2nd mortgage and not their 1st is because they probably got their second from the equity of their home and therefore it is not considered a non-recourse loan. If it not a non-recourse loan, the foreclosure will not eliminate the debt. The 1st can foreclose and you would still owe on the 2nd because in California, only non-recourse loans are wiped out by the non-judicial foreclosure. You still owe the 2nd debt.

  3. Ian,

    Not me.

  4. Debt collection – and sale (or SWAP) of collection rights is for EVERYTHING — credit cards, second mortgages, HELOCs, student loans, auto loans — and – yes — mortgages converted to default debts.

    And, NO ONE regulates the distressed debt buyers/hedge funds. We have NO access to this information. NO court enforces disclosure of it, no government agency regulates it.

    DEREGULATED. But, deregulated does not mean NO FRAUD — and does not mean NO criminal behavior.

    This is our #1 problem.

  5. Bob, start your own collection company, Bob’s Collections. Go here to buy your CC or Mortgage debt, collect the debt from yourself or sue yourself to collect it or do nothing.. HaHa.
    http://debtconnection.com/debtsellers.asp

  6. I’ve been trying to talk with the Lender (same for 1st & 2nd) for over 2 years. They said to default on the 1st to get the Hamp / Tarp assistance – I quickly paid up within weeks due to 6 calls a day for late payments.

    THEN, they didn’t credit 3 of my payments…Sent 2 QWR and no updates on my payments. Their final response to the QWRs, they told me to hire an attorney, they would not respond to my QWR anymore (my last response before this notification told them to communicate with my attorney, in the last paragraph – guess the letter was too long for their comprehension…).

    So, they won’t ‘communicate’ so I stopped paying. I did receive a letter about eminent foreclosure coming and then nothing.

    Though I stopped paying the 1st, I paid the 2nd. A couple of months ago I received intent to foreclose letter on my 2nd for reasons of ‘non monetary default’. WOW! They are really reaching now.

    Due to their NON communication, harassment & bad business (I would be fined and/or in jail if I ran a business like them – ‘separate but equal’), I have found a number of issues which makes the 1st ‘void’.

    The 2nd was refinanced within a year and paid off the original 2nd which was also ‘void’. I figured I’d let the 2nd mortgage slide and keep paying…I guess due to moral issues, but now I think I will go after both mortgages as ‘void’ and demand repayment of the 2nd refinance proceeds that paid off the original, void 2nd mortgage.

    I guess I was just another ‘sheep’ that paid their 2nd because I could afford to do so, and I have that ‘moral’ issue which really isn’t a ‘normal’ American behavior. To survive in the U.S. and to ‘get ahead’ : Greed rules; there can only be one winner (so the rest of us are losers- what?!) and plow over everyone so one can get that new 3D TV!

    Too bad I didn’t realize this straight out of high school – it wasn’t anything I was or wasn’t doing correctly. The cards were stacked from the get go.

    So, a Void mortgage is a Void mortgage, nothing more….

  7. To Linda and Ian

    The only way a 2nd “would become a lst” is if the holder of the 2nd forclosed. The 1st is still there and the holder of the 2nd now becomes the property owner and has the original lst on it. But the 2nd rarely forecloses because it, most likely, has no equity left and furthermorethe property is usually worth less than the lst that remains.
    The normal thing is that the 1st forecloses and the second loses its equitable lien. The loan is still there, however, and it is in that case wherein the holder of the 2nd now goes after the original property owner, seeking a deficiency judgment. That is what puts so many Calif owners in dire straits…they lost the property and can still be liable for a large 2nd loan.

  8. Bob: Yes HELOCs are securitized. But you seem to imply that credit card debt and HELOCs will result in enforcement actions filed against the borrower. This is not typically the case. Once the debt is written off, it is sold to debt collectors who pay progressively less and less for each credit file after it has gone through its gun and dun routine. It is rare that an actual lawsuit is filed to collect. The preferred method is intimidation through telephone banks and mail campaigns. If you do the math you’ll see why — collections are a small percentage of the total debt. If lawyers were hired for every debt, the cost would exceed the collections.

  9. It’s because most people still don’t know if the Produce the Note/Quite Title defenses apply to Home Equity Lines of Credit (HELOC’S) and because in some states you are not responsible for deficiencies on the 1st but you are on HELOC”s. They can come after you like they would a credit card debt. I’ve asked this questions several times on this site and still don’t have an answer. Are HELOCS securitized like 1st mortgages?

  10. To joan vor:

    If the second can’t go for a deficiency in CA, then what happens to the first? Is it gone or what?

    To Ian: I wondered about that as well. I guess the 2nd mortgage becomes the first.

  11. The people pursuing this strategy would be ones who cannot, or won’t, file a Chap 13 bankruptcy. In a chapter 13, you can drop the second mortgage if the debt on the first mortgage is greater than the value of the home. If you cannot meet this test, or if you cannot file a chap 13 due to other circumstances, then the strategy that this post discusses makes sense.

    For me, a chapter 13 will get rid of the second mortgage just fine. And that will happen when the first mortgage is safely out of the way, one way or the other. But for others, paying the 2nd makes very much sense, especially if you can get a negotiated settlement that modifies the terms of the 2nd with a principal reduction.

  12. I wonder if this has something to do with the HAMP program. If the servicers are telling people that they have to stop paying their mortgage in order to be eligible for HAMP, and the mortgages at issue are mostly first mortgages, then you might be seeing people defaulting on the first mortgage for that reason. Since the homeowner is otherwise making payments on both mortgages, but only defaults on the first because of the advice of servicers, then that might explain the irrational move of defaulting on the first and not the second.

  13. Nope. Here’s the real deal. See the webcast below, especially the part where the nerdy female economist shows what’s really happening with the seconds vs the firsts. Bottom line: banks holding tens of billions of seconds on their balance sheets, and are screwing over the holders of the firsts, so as not to have to take the losses on the seconds. See for yourself.

    http://www.mortgagemag.com/news/2010/1016/1000021907070.htm

    See also stuff at this link:

    http://www.securitiesdocket.com/2010/11/

  14. […] This post was mentioned on Twitter by Martell Thornton. Martell Thornton said: STRATEGIC DEFAULT ANOMALY: Borrowers Continuing Payment on 2d …: In California, there is the one action rule, … http://bit.ly/fAONp1 […]

  15. I just went to a local bank to open my new account. They do not do the first lien home loan nor securitize the loans. But they do the second lien home equity loans and not sell the notes to others to securitize them. Do they have some advantage over those big banks which do business in short terms???
    I am going to close the big bank accounts from a infamous pretender lender. I am done with them.

  16. perhaps I am missing something here- if the 1st mortgage is unenforceable, why would the 2nd mortgage not be unenforceable as well? All responses should let us know why this is not so.

  17. A response to Linda..

    IF the lender forecloses on the second, the lender takes title subject to the first trust deed. The first trust deed is NOT elimanated.

    Conversely, if the lst forecloses, the second is foreclosed out…In that case, the second often will go for a deficiency judgment. However in Calif if the same lender owns the lst and the second, the secoond cannot go for a deficiency.

  18. jan van eck or anonymous- I just got a response on my other email, was that either one of you? Let me know on LL thanks Ian

  19. anonymous or jan van eck- did either one of you just respond to my post of the last hour to my website, http://www.sopkolandscape.com? I don’t want to broadcast my thoughts to the other side. Please respond on LL asap. thanks,Ian sopko

  20. My 1st and HELOC are with the same pretender lender and both loans name MERS as the nominee/bene.

    Dummy me, I was still paying the 2nd even after I had defaulted on my 1st. I wish I had just saved that money.

    Anyone else have a MERS Heloc?

  21. If the 2nd is not securitized or re-sold under dubious circumstances, and most are not, then it has inherent strength and paying it makes perfect sense if you think the 1st is going to fail as a secured claim on the property. But if the 1st is going to prevail then paying the 2nd is not logical, unless you calculate that the 2nd will challenge the 1st, which typically they do not do.

  22. For an example, when the servicer on the 1st manufactures a default by way of a 97% increase using a discretionary escrow, the 2nd remains current, along with taxes & insurance; while the litigation proceeds with the 1st SOB.

  23. Amazing strategy! You must have read my mind because it’s already in one of the quiet title suits I am involved in! http://www.cloudedtitles.com

  24. I stopped paying on both at the same time, and I was surprised that I haven’t heard a peep about the second mortgage. The same servicer has both loans. I sent a QWR to both and the second went an extra step to tell me that the second mortgage is still in full force. I’m not sure what that means, or if I opened pandora’s box by sending the QWR.

  25. ANONYMOUS or JAN van ECK- I have something which has not been addressed in the two years I have logged onto LL. It may be a smoking gun, so I don’t know if I should just post it here. If either one of you are willing to provide your email address,(Neil, this includes you) I will send along my simple hypothesis. My websit email for my landscape business is sopkolandscape.com,that is a gmail acct.,if that makes any difference. Thanks,Ian

  26. This strategy makes perfect sense to me. Get the banks fighting amongst themselves while the homeowner walks away with a self-made modification in the form of the second lien, which then becomes the first lien.

    I hope I’m understanding your post all right. I had a chance to do the above as the bank was foreclosing on my second only. (Still don’t understand why they did that.) The whole experience with them ignoring my QWR, tender of payment, and debt validation, however, made me so mad I refused to give them another dime.

    As joan vor stated above, CA has the one-action rule. I think that means since both my 1st and 2nd are with the same bank, they just wiped out my first by foreclosing on my second. They can’t come back and foreclose on the first.

    I found an attorney who thinks we should go after them for refusing tender of payment in full (as a condition the bank show me the note and answer other requests). Of course, I also found evidence of fraud in the “loan” docs as well as trustee’s paperwork.

  27. With penalties and interest we are now about 27,000 behind on our first mortgage, but we are keeping our second mortgage less than 90 days delinquent. Our second mortgage HELOC with BOA is on a plan currently below 2%. As far as I know the loan is not securitized but held by BOA which has made concessions to help us stay current. The first mortgage is headed for a show down one day we know, but we have fended them off with forebearance and loan mod offers. When a notice of trustee sale, 43 identical copies of Notice of Trustee Sale were mailed certified mail to us, I wrote with a red sharpy on everyone “REFUSED FOR CAUSE” and attached a letter asserting that a modification agreement had already been reached between us and the servicer and that they had better check with them before they wrongfully foreclosed and became liable for damages. They rescidned the notices not once but twice.
    Since then a letter to the servicer was sent saying that we are ready to cure the default as soon as they could provide documentation showing who the legally assigned owner of the note was. They had previously sent a copy of the note with no endorsements except an illegible stamp of some kind. We acknowledged that we still could not determine who the creditor is and please send us proper documentation so we can cure this default immediately. The servicer has not responded in over a month.
    The funny thing is BOA is also the alleged trustee for the securitized MERS bundled up loan. So if BOA forecloses on the house for the 180K on the first, the 145K on the second will default, but if the first in unsecured by frauduant mishandling, then they still get to keep the second without a fight.
    We can afford to pay our second and since it is a line of credit, it may help us to rebuild our credit or at least give us a banking option since we no longer have credit cards or even a checking account.
    BK is also in our future most likely, but the second mortgage may survive that as well.
    Finally, in response to the question, why, it is easier to deal with one problem than with two since either encumbrance has right of sale in the contract.
    Wish us luck, Still looking for the right lawyer.
    Bruce

  28. In California, there is the one action rule, i.e., a lender has to choose either a judicial or non-judicial foreclosure. Due to the expense, time, right of redemption, etc., a Calif lender will almost always choose a non-judicial foreclosure. In so doing, the borrower is not subject to a deficiency judgment on the lst. Furthermore, if both the second and the first trust deed are held by the same lender, even the second trust deed holder cannot have a deficiency judgment. By Calif case law, this follows because the lender, in foreclosing on the first knew that the second holder (i.e., himself) would be foreclosed out.

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