Loan Modification for 2nd Mortgage Without Modifying the 1st Mortgage
We have 1st and 2nd mortgage. We do not want to modify first since we have 3.35% interest rate. But second is bad it is 8%.
To make things worse 1st and 2nd together are about $80k higher than the appraisal; so, we have negative equity.
The second itself is about $100k.
We are current, never missed payment.
If we could modify second and extinguish $80K out of that (so we get zero equity instead of negative) we would accept the difference of $20K as the modifed second mortgage.
Is this possible?
Is it possible to modify the 2nd mortgage without modifying the 1st mortgage?
If not, we think of giving up, walking away and foreclosing. When house is sold 1st mortgage would get settled at zero loss or some loss but 2nd mortgage holder (btw it is different than the 1st mortgage holder) would take complete loss since there will be nothing left for them to settle. Since we are in California (a non-recourse state) 2nd mortgage holder can not go after us if we foreclose. We would like to stay if modification is possible but with negative equity there is no motivation - we need to be rational. Negative equity of $80k is a big load.
Any advice, comment? Mortgage Loan Modification Answer:
You didn't mention that you are experiencing any hardship beyond the fact that your property value is underwater by 80k. Since you mentioned that you have never been late and are current on your mortgages, I'm going to assume that you are able to afford your monthly payments.
However, you are willing to walk away and let the bank foreclose as an option unless your 2nd mortgage
is modified. If your 2nd is a refinance loan as opposed to a purchase loan, I believe your 2nd mortgage lender can file a deficiency judgment against you in California. There's no recourse on 1st mortgage purchase money loans for a primary residence, but refinanced 2nd mortgage loans are not treated the same way.
I have not heard of anyone being able to get a lender to modify their second mortgage without the first mortgage being modified at all. What I have heard from people in your similar position is getting the lender to change their adjustable rate into a lower fixed rate on their second mortgages. Is your 2nd mortgage on an adjustable rate? Why not ask your 2nd mtg lender what they are willing to do as far as rate or pricipal reduction?
You may want to speak with your tax accountant as well as an experienced foreclosure attorney to confirm what the consequences are, tax and liability-wise if you choose to strategically default
on your loan.
I myself would rather do a short sale than a foreclosure if in the same position. But even with a short sale, the tax and liability consequences are similar, but at least a deficiency judgment can be waived if negotiated properly during a short sale. The IRS tax consequences for debt forgiveness on a refinanced 2nd mortgage, however, may be inescapable. This is where you would need expert advice from a qualified attorney and tax accountant.
Please come back and let us know the outcome of whatever route you choose to take. Visitors to this site will greatly benefit from any information you can share.
All the best to you and your family.