Expert: Dick Dennis - 10/21/2008

Question
QUESTION: Your Question was:

Hi Toni,
I have a question for you regarding negotiating my 2nd mortgage with Bank of America. I have a house in burke, VA. We bought it in 2005 for 358 k. By we, i mean me, my brother and his wife. All three of us are in the title, but the first mortgage and 2nd mortgage were all in my sister in law's name since she had great credit. We didn't put money down at all, so the ratio is 80% first mrtg which is 286400 and 20% second mrtg which is 71600. Then on 2006, when the house market were peaking, i had to take 65000 of home equity for personal reason, so the 2nd mortgage became 136600. Then on 2007, to save interest, i refinanced the 2nd with Bank of America with fixed rate for 30 yrs instead of 5 yrs ARM which was pretty good deal. I refinanced it under my name, not my sister in law's, but the 1st mortgage is still under her name. Now situation is very much different. I lost my job, have to support my dad who is very ill, and i can't afford to pay my 1st and 2nd mortgage anymore. Friend of mine who is a loan officer offered to help by negotiating with Bank of America to wipe out the loan and settled for way way less. He did it with three of his clients before with wachovia, countrywide and aurora, and their 100 something thousand dollars 2nd mortgage were wiped out and settled for in between 10000 to 15000 dollars. I was encouraged to do this since i can probably loan 15000 dollars and settled the 2nd mortgage. I was late for 3 months, then BOFA were ready to negotiate. The paper work of loan modification came in 2 weeks ago and the refused to settle. They gave me 21000 discount on the loan, and cut the interest rate from 7.69% to 4.69% but still 30 yrs length. I saved 350 dollars but again i still want to settled for 15000. They said if i don't agree with this, they have to foreclose the house. I was very surprised because my friend said that they will not be able to do so because the 1st mortgage is under my sister in law's name and she never make a single late payment. How is bank of america can foreclose the house if the 1st mortgage is still being paid? I don't know if BOFA is just bluffing or what...but i am scared as hell. Bottom line is that i don't want to screw my sister in law's credit score, because i was assured that as long as the 1st mrtgage is still satisfied, the 2nd mortgage usually agree to settle because they have no choice.
Please help me to resolve this matter. All i care about is to be able to live in the house and not bothering my sister in law's credit. The 1st mortgage 5 yrs ARM is expired on September 2009, and i am scared if the payment will be different after that. I am trying to refinance but can not do it because house price is upside down.


ANSWER: First of all, Agus, my name is Dick. Dick Dennis. Second, if you don't pay on the 2nd mortgage, you may as well not pay on the 1st, too, because the second mortgage holder (probably the same lender as the first) would foreclose and by foreclosing THEY take over the first payment AND THE TITLE TO THE PROPERTY. Your sister-in-law gets wiped out and screw up her credit.

She, despite you getting a refi second TD, is responsible. And Bank of America knows this. That's why they are screwing with you. They detect that you don't want to lose the house so you are in no position to bargain. Remember this, Agus: "He who wants it most, loses" when you are negotiating.

In otherwords, Agus, you don't have much choice in this matter if you really want that house and you don't want to screw up your sister-in-law's credit. Otherwise, you can play poker by calling their bluff if that is what you think they are doing, by letting the house go into foreclosure and see how far they will let it go before they do some serious negotiating with you.

Since B of A is the lender in the first as well as the 2nd, they would foreclose on the 2nd because it would cost them less. Now it's up to you, Agus. I do wish you well.

Dick Dennis



---------- FOLLOW-UP ----------

QUESTION: Dear Dick,

Thank you very much for answering my question so soon, and sorry to have mentioned you by a wrong name. I was confused :) There is one more thing i'd like to inform you. The first mortgage bank is Aurora, and the second mortgage is Bank of America. They are definitely not the same. I forgot to mention that on my last question. So...I don't know if that changes your explanation before since the bank are not the same. I know that if the 1st and 2nd loan are owned by one bank, i would have been a dead meat. But since they are different bank, I thought i'd try a long shot. See... I still don't understand why B of A can foreclose the house if Aurora is always paid every month. If i was in Aurora position, i would not let go of the house because they don't have anything to lose. The house price is upside down now. If they decided to foreclose it, then Aurora will get the money once the house is sold and B of A will not get anything. My question to you is, is it true that B of A can foreclose the house with only 20% stake on the house ?

Please advise. I don't know if this will make any different to your answer before.

Thank you!

Best,

Agus :)

ANSWER: To explain the succession of liens on a property, Agus, in the number one position is always the local (state-county) taxes. They always must be in a paid position or the successive liens (first, second mortgages) have the right to put the property into foreclosure after paying the taxes and bringing them up to date. If the taxes are ever not paid, no matter how many liens are behind it, the county can foreclose on the house and ALL the successive liens are wiped out and if anyone should buy the property from the county in a tax sale, that person would buy the property WITHOUT any mortgages or liens of any kind.

With all that in mind, the mortgage obtained when buying the property always must be the first liens, subject to the property taxes. So, when the property is purchased, the lender makes sure, through a title search with the title company, that indeed they are in the first position. That title search is part of the cost the lender shuffles off to the buyer. As long as the taxes are paid and the property is maintained in livable condition, and of course, the mortgage payments are made, everything is copacetic.

Now the owner gets a second mortgage. Again, the lender checks to make sure that there are no other liens in front of the second lender except for the county tax (which is always a lien even after paid), and the first mortgage. Now the second mortgage lender is happy as long as the property taxes are paid, the first mortgage is paid and they are paid. IF ANY OF THOSE ARE NOT PAID, the second mortgage may start foreclosure action, EVEN IF THE SECOND MORTGAGE IS CURRENT.

The first mortgage is not concerned if the second is not paid. Heck, the first mortgage doesn't even care if there is a second in existence. If the owner does not make payments on the second, the lender may start foreclosure action. That means should the second never brought up to date, the second may foreclose and take title to the property. So, that the second mortgage lender does not lose its interest in the property, it will continue to make payments on the first mortgage. The first mortgage can never lose any money as long as the payments are being made it that lender.

To answer your question, yes, B of A can foreclose on the house even though only 20% stake in the house. What difference does it make if it is $20,000 or 20 cents? They have the right to foreclose. But if they feel it would cost them more to foreclose than what it is worth to them, they may never foreclose. They could just sit there and do nothing . . . until . . . some day in the future when the owner decides to sell and must contend with the second who has its interest in the property. The seller will have to pay it off if he wants to sell that house. No matter what.

So, to sum it up, your sister-in-law will be harmed credit-wise if you do not pay on the second because the second would foreclose and the property now belongs to someone else (a lender) who can then sell it to someone else and wipe out the loan your sister-in-law made. She does, however, have the right to bring the second current since she could lose her interest in the property. The first AND second lenders are sitting in the catbird seats because they figure she would not let any payments go into foreclosure.

Dick Dennis

---------- FOLLOW-UP ----------

QUESTION: Dear Dennis, thank you very much again for your recent reply. I took your advice and tried to work with the bank but unfortunately my situation just can not be helped anymore. We decided to foreclose the house. Now i need a couple advice from you as to when we should move out of the house without being thrown out to the street. I live in burke, Virginia. Now the first mortgage is still current and the second mortgage with BOA is also still current. If we plan to let the house go into foreclosure, we want to take advantage by not moving out so soon and use the mortgage payment we don't pay to the bank for other use. Might as well do it, right? For how long do you think i will be able to stay in the house? My friend who had the same thing stayed in her house for 9 months. Is that even possible? And is it true that one day the bank can show up unannounced and kick me out of the house without notice? What would be the decent time for me to move out? I need to plan ahead to rent an apartment or a townhome but don't know when i should move out. And one last thing, for how long will this foreclosure record stay in my credit score and how bad is my FICO score going to take damaged? Am i going to have a hard time getting approved for an apartment for rent?

Please share your advise for this matter. Any valuable tips based on your experience about foreclosure will be really appreciated. Thank you very much !

Best,

Agus :)

Answer
If your friend was able to stay in her house for 9 months, chances are you might be able to do the same. If you are resigned to lose the house to foreclosure, then you may as well stop making payments to both mortgages now. This is what will happen: Nothing for at least 3 months. Maybe 4. Then they will start sending you "reminders" and other kinds of letters. Since you already have talked to your lenders, you can reply to those letters if you want. Then they will file a notice of default. The process with the banks continue, but you will probably be able to stay in your house another three months before they send you a notice that you will have to move out by such and such date. Then you can start making your plans for moving. Nobody will ever "throw" you out of the house without some kind of written notice. Of course your credit score will go down. It depends on how bad it has been up until how. And yes, you may have problems getting approved for renting an apartment. And maybe not. You can start to go hunting for one and see what you can find. You will have the money you would have had to pay for the mortgages saved up so you will have enough for what is required to move into an apartment. I do wish you well, Agus.

Dick Dennis