Los Altos Real Estate Blog


The secret to cancelling and not paying a Silicon Valley second mortgage

I have no sympathy for second mortgage lenders who made loans at high interest rates during the boom years and then got even more greedy in the downturn by asking for too much money during a short sale.  Those lenders have made short sales all around the country extremely difficult and stressful for many homeowners.  The good news is that in California, and perhaps other parts of the country, there is relief in sight.

The secret is bankruptcy.  As the law currently exists today, when a person files bankruptcy the second mortgage can be considered unsercured debt, even if the lender is on title.  That debt can be wiped out if the value of the home is less than the first mortgage, which is often the case in short sales.  This also prevents foreclosure and allows the homeowner to stay in the home.  In high-priced California, this has a seldom talked about but extremely valuable tool to enable homeowners to avoid foreclosure and say in their homes, even in bankruptcy.

Once in bankruptcy, the overall debt can be restructured and a payment plan put into place to get the borrower in line with their debts.  As part of that, once the secondary debt is paid off and the borrower is on track with their first mortgage, the second mortgage is eliminated.  The potential is to save tens of thousands of dollars, if not more.  While the bankers don't like this approach, I think it's brilliant.

I hear and read many stories from homeowners who try to conduct short sales only to have second mortgage lenders hold them hostage with unrealistic settlement amounts that make the transactions falls apart.  The investors behind these loans refuse to get a reality check as to propetry values and end up hurting everyone in the process.  Homes that go to foreclosure typically sell for 15-20% less than they would have as short sales.  This hurts the markets and the banks in addition to putting the former homeowner  out on the street.

So, the secret is bankruptcy.  I highly recommend consulting an attorney for more details and to determine if your situation will benefit from this approach.

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 Bryan Robertson, CEO | T: 650.799.9951 | Email: bryan@catarra-re.com | Website: http://www.BryanRobertsonHomes.com |CA BRE# 01191946 | Catarra Real Estate, Inc  | 171 Main St #220 | Los Altos, CA 94022



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Comment balloon 6 commentsBryan Robertson • May 11 2011 04:33PM


Very interesting Bryan.


Posted by Mickey Hayward, Farm - Land - Home Sales & Commercial Real Estate (Sunset Properties, Hayward Realty) almost 8 years ago

Yes I agree with you suggesting hiring an attorney. My background in the corporate world included heading credit departments. Bankruptcy is tricky and depend totally on the judge and that judge basically makes his or her own rules. Thanks for the blog as it is an interesting idea.

Posted by Robert Bob Gilbert, Your Katy TX ( West of Houston) Real Estate Expert (Berkshire Hathaway HomeServices Anderson Properties) almost 8 years ago

Bryan - thank you for sharing this concept.  Loose lending practices got a lot of homeowners in the position they are currently in.  While I hate for anyone to take advantage of the system, sometimes you have to in order to not lose everything. 

Posted by Bill & Cyndi Daves, TeamDAVES - Your REALTORS In the GA/NC Mountains! (Hiawassee, Young Harris, Blairsville, Hayesville, Murphy and Beyond!) almost 8 years ago

Wow, are you are in tricky territory here. While you suggest "hire an attorney", you also imply that filing a bankruptcy is a way to get out of paying a presumably unfair second mortgage.

Posted by Leslie Ebersole, I help brokers build businesses they love. (Swanepoel T3 Group) almost 8 years ago

Mickey - Thank you.

Robert - Bankruptcy is complicated and not a "sure thing" but there is a provision in the law in California that allows 2nd mortgages to be eliminated.  While perhaps not a cure all, it is something for borrowers to consider if their loans outweigh their equity and they are facing foreclosure.

Bill & Cyndi - There were certainly a few people who took advantage of the loose lending practices and got in over their heads.  However, the issue really is 2nd mortgage investors who don't have a grasp on reality in short sales.  Too many 2nd mortgage holders are asking for more than is fair.  It's a major issue causing delays and heartache all around the country.  The issue is well known and understood by the politicians but other than HAFA approval, there's isn't a solution.

Leslie - I went back to read what I wrote and I don't think I'm offering legal advice per se because I'm not suggesting it to a specific person.  I am pointing out a legal process that has made the papers recently.  I think this is important for people to know because in California, a lot of short sales end up going to foreclosure because 2nd mortgage holders don't cooperate.  They demand compensation that isn't in line with the value of the homes or change their requirements at the last minute.  As a result, many people are losing their homes.  This is just one way to wipe out the debt and keep people in their homes.

This issue of 2nd mortgage holders was a major topic at the recent C.A.R. meetings in Sacramento.  I heard a lot of stories of people losing their homes due to nasty 2nd mortgage holders.

Posted by Bryan Robertson almost 8 years ago

Bryan, you know I enjoy the debate, but not just for entertainment purposes. Not a day goes by when I don't think about the boundaries of what we should market.

I have only recently started picking up bits and pieces about bankruptcy, so I'm interested in the topic. I'd love to see you write more about it.

Posted by Leslie Ebersole, I help brokers build businesses they love. (Swanepoel T3 Group) almost 8 years ago

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