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Why It Makes Sense to Consider Debt Settlement for Second Mortgages and HELOCs

The debt settlement strategy has generally been limited to negotiation of unsecured debt accounts like credit card debt, store charge cards, personal loans, and medical bills. With secured debts, there is always collateral at stake, in the form of property like a home or vehicle. Given the right of secured creditors to foreclose or repossess property, it didn’t make much sense to apply the same tactics to secured debts. So whenever a debt settlement client would ask for my advice about their mortgage, my usual response was, “Don’t mess with secured debts.”

How times have changed! Today, after a multi-year flood of foreclosures, we’re in an era where first loan modifications and second lien settlements have become quite common. This article will specifically focus on the settlement of second mortgages, or home equity lines of credit (HELOCs), where a “settlement” is defined as an agreement by the creditor to accept less than the principal balance on the note. In what follows, I’m assuming the loan in question is a “recourse” loan, meaning the lender would have the right to pursue legal action even if the property had been foreclosed upon by the first lender. Generally speaking, most second mortgages and/or HELOCs are in this category. As I discussed in this recent blog post, some of my clients have reported amazing settlements of 10-15% on their seconds.

First, let’s address the most common question people have: How is it possible to settle a second mortgage? Obviously, every real estate situation carries its own unique set of numbers, but if conditions are right, settlement is possible. So let’s talk about those conditions. It all starts with whether or not there is equity remaining in the property after the first mortgage is satisfied. If you owe $400,000 on a first mortgage and your house is showing on Zillow.com for $350,000, then you are “upside down” on the first mortgage alone. If there is a second lien on top of the first in the form of a mortgage or an equity line of credit, then that note is 100% under water. In such cases, it may be possible to negotiate a great settlement with the second mortgage holder.

Settlement of second liens breaks down into two main categories – before foreclosure or after foreclosure. Settlement of second mortgages prior to a foreclosure action being initiated by the first mortgage lender is possible in many cases where the second lien is totally exposed (or even just partly exposed). A short sale often leads to this type of negotiation. But there have also been cases where the debtor stayed in the property, obtained a loan modification from the first lender (thus avoiding foreclosure), and successfully settled with the second mortgage holder.

Why is this possible at all? Why are lenders accepting such low settlements on second mortgages on these types of accounts? In my view, it’s primarily the bankruptcy factor coming into play here. Many people will rightfully balk at the idea of filing bankruptcy when the debt load in question is, say, only $30,000. But a second mortgage of $80k, $100k, even $250k or more is a totally different story, and such high balances obviously make bankruptcy a compelling option for consumers. The critical factor is that second liens can be stripped in Chapter 13 bankruptcy (i.e., converted to unsecured debts and included in the bankruptcy plan). Lenders know this, so they walk a much narrower tightrope than credit card banks do in terms of collection practices, just based on the huge dollars involved. Push too hard, no recovery.

What about settlement of second mortgages AFTER foreclosure? Once a home is lost to foreclosure, there is often little or nothing left after the auction sale to cover the second lien, leaving the second lender holding the bag. Adding insult to injury, many former homeowners are shocked to learn that foreclosure does not end the potential financial problems associated with the lost property. As noted above, second mortgages are usually recourse loans, meaning they are a type of contract that permits the lender to pursue recovery against the unpaid balance even *after* the original collateral has been lost to foreclosure. So it’s common for consumers to receive aggressive notices and threatening phone calls from a lender attempting to recover against a second lien. How should such a situation be handled? Should you negotiate a settlement, or simply ignore the threats?

Assuming the consumer has not declared bankruptcy yet, the true question here is, “What’s my risk?” The correct answer is, “Nobody knows the risk for sure.” This is new territory. We simply have never had a situation where $1 trillion of second mortgages are sitting on the books at valuations far in excess of what they are actually worth on the market. So far, lenders have been reluctant to litigate these claims, and no clear pattern of legal collections has taken place relative to second liens, pre or post-foreclosure.

Based on this “all quiet” perspective, one school of thought among debt advisors says, “Don’t even bother settling a sold off junior lien, since even recourse lenders are not pursuing litigation on these charged-off loans. Just wait out the Statute of Limitations (SOL) for your state and then you’re in the clear.”

Folks, I think that’s bad financial advice. For one thing, the SOL period varies from state to state, all the way from 3 years in states like North Carolina, to 15 years for Ohio, with most states having an SOL period of 4-6 years. For the average person, three years or more is an unacceptably long time to wait with crossed fingers hoping that nothing bad will happen meanwhile.

Further, your credit standing will be compromised as long as the second lien remains unresolved. It will sit there on your credit report, and even if (after time) it no longer affects your FICO score, virtually all prospective lenders will treat it as an open obligation. Therefore it *will* be counted in your current debt-to-income ratio. Goodbye new mortgage, refinancing, auto loan, etc.

Perhaps more importantly, as they say in the investment industry, past performance is not a guarantee of future results. Just because JP Morgan Chase, Citibank, Bank of America, and other major lenders have not been aggressively litigating these second mortgage claims yet, that does not mean we won’t see a full court press in 2012 or beyond. There are BIG dollars at stake, with the four largest lenders holding some $400 billion in overvalued second mortgages, or roughly 40% of the total.

Also, with that much money at stake, it’s only a matter of time before the big debt purchasers gear up to work these types of accounts. We can expect a take-no-prisoners approach from the worst of them, and unrealistic settlement requirements from many others. For a consumer who can raise the resources needed to settle an unresolved second lien for 10-15%, it makes all the sense in the world to put the fire out before it gets going.

Let me inject some very important caveats. I am NOT suggesting that consumers start purposely defaulting on their second mortgages simply because they are out to save some money or get better loan contracts. Settlement of second liens is a strategy that definitely applies in many distressed property situations, but it’s certainly not applicable in all cases. Also, very importantly, not all second mortgages and HELOCs are created equal. Some creditors are much more stubborn about settlement, depending on the type of loan, whether it was packaged for sale to investors, and so on.

In closing, the best general advice I can offer is to step back from the emotions associated with any property that you own. Look at the raw numbers and let the math do the talking. Check the current value of your property and assess where you stand in terms of the second mortgage. If your analysis indicates the second mortgage or HELOC is uncovered by 100% or more, then other factors aside, this fact alone points toward further consideration of the settlement strategy. Consult with a professional financial advisor knowledgeable in this area, but be wary of anyone promising a quick fix for mortgage problems. Settlement of any large contractual obligation like a mortgage or note requires patience, commitment, and determination.

Why It Makes Sense to Consider Debt Settlement for Second Mortgages and HELOCs by

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About Charles Phelan

Charles Phelan
  • FRANK LOAN

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  • FRANK LOAN

    DEAR SIR/ MADAM,

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    5: PHONE CONTACT: ….

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    NOTE: THE MINIMUM AND MAXIMUM LOAN AMOUNT WE OFFER IS 1,000 THOUSAND DOLLARS TO 200 MILLION DOLLARS

    ALL RESPONSE SHOULD BE SENT ONLY TO:

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    IMMEDIATE ATTENTION NEEDED.

  • NeedhelpinAZ

    How likely am I to obtain a settlement with HELOC bank? HELOC is $53K, 1st mortgage $125K – homes in the area are selling for $115K. I’m hoping to settle for 5-15% of total owed. Filed/discharged with Chapter 7 bankruptcy but did not reaffirm either loan, payments are current but I don’t think the homes in this area will ever sell for above $150K.

    • http://www.zipdebt.com/ Charles Phelan

      NeedhelpinAZ, HELOC is not the name of a bank. It just means Home Equity Line of Credit. If the home is worth less than you owe on the first mortgage, it *may* be possible to negotiate a settlement on the second/HELOC, depending on the lender and various other factors. It helps that you no longer have personal liability for the account.

  • Michaux

    Great article. Similar to a previous poster, I do not have a financial hardship. Live in Maryland. Current payments, financially stable/strong. I have a first of $361K and a 2nd of $91K. This was an original 80/20 from 2005. The 1st is with PNC. My 2nd, originally with GMAC, is now serviced by Ocwen. Home is valued at $290K based on Zillow. My goal is to move in 3-4 years, but clearly cant sell or rent without a significant paydown, which liquidity I dont have. Would the 2nd mortgage holder consider a settlement, given they are completely underwater, and the 1st is partially underwater? Im thinking my leverage is if this foreclosed, the 2nd would get nothing and given my personal finances, I could find another place to live and be fine (although I wouldnt exercise that strategy as I would much rather protect my personal credit standing). Am I being overly optimistic?

    • http://www.zipdebt.com/ Charles Phelan

      Michaux, if you are asking whether it might be possible to settle the second mortgage while in current standing on the loan, then you are definitely being overly optimistic. “No, thanks,” will be the answer. It is usually necessary to be in serious default, to the point of charge-off and beyond, in order to gain any traction in a settlement negotiation. Credit damage and potential tax impact are two very big factors to consider before going down this road. Also, the sticking point in many second mortgage settlement negotiations is financial disclosure. For someone in a world of hurt financially, it’s no problem to provide the required information since it only supports the need for a settlement. But if you are in good shape in terms of income, then the disclosures would work against you in the negotiation. So there is a lot to be considered before deciding settlement is your strategy of choice. Depending on the terms of your loans, you may want to investigate a HARP refinance first, by calling a HUD agency and letting them run the numbers for you.

  • mustang

    Thanks for the article I have read lots and still not sure where to start. I have a heloc in the amount of 40k and usbank has changed my account status to charged off in feb. I called them and tried to talk to them about it with no luck. i just get transfered around. I was given a name of someone in the recovery department who is the account manager assigned to my case. I have left several voicemails over the past 3 months with no reurned calls. I have am current on my first and plan on staying in the house. I believe the 136 i owe on my first loan is about the value of the home. other homes in the neighborhood are selling for much less when they are forclosures.

    I would pay this in full if they could reinstate the loan and let me make payments for the next 2-4 years.

    What is the correct path to take to get this resolved so i dont lose my home? I can come up with 10 percent (4k within the month by selling assets). How do i get in touch with someone that can make decisions? Can I get the charged-off removed from my credit report? What are the tax issues associated with the settlement?

    Thanks for any help you can give me on this matter.

    • http://GetOutOfDebt.org Steve Rhode

      Just worth knowing: If your first mortgage is at or exceeds the market value of your house you could strip the second mortgage with a chapter 13 bankruptcy.

      Just worth knowing if you can’t get anywhere.

    • http://www.zipdebt.com/ Charles Phelan

      Mustang, you won’t be able to get a charge-off entry removed, but a settlement would yield a zero balance notation, so other creditors/lenders would not count it as part of your debt-to-income ratio. A settlement will result in a 1099-C, and that amount is taxable as ordinary income unless you qualify for an exemption under the Mortgage Forgiveness Debt Relief Act, or you are insolvent at the time of settlement. For detailed information on these exemptions, please see IRS Publication 4681.

      You should consult with a BK attorney to determine whether a Chapter 13 lien-strip is possible given your property valuation. If yes, then you will be negotiating from a stronger position than otherwise. It would also be a good idea for you to talk with a HUD agency counselor about your situation. See if any of the government programs might help, especially since you are willing to make payments if they reinstate the loan.

      As to negotiating a settlement itself, it’s difficult to provide advice in a blog reply. But the general idea is that mortgage settlement proposals, unlike credit card settlements, are best handled as a written offer. But you have to be patient. These second mortgage charge-offs often go nowhere, and I’ve seen numerous situations where the lender has done virtually nothing one way or the other — with years ticking off the clock meanwhile.

  • jham

    Hello, I have a situation and would like some advice if possible. I am current on my first with boa, I have a Heloc on this property with Regions. I owed about 40k about a year ago making interest only payments. I had some financial situations and decided not to make any more payments. I planned on getting some help in settling this debt, now I’ve received a letter from a debt collection law first asking for the entire balance to paid in full. What are my options?? Ideally I would like to settle.

    • http://www.zipdebt.com/ Charles Phelan

      If you have received notice from a collection law firm, then you should
      talk to an attorney about your situation before you do anything else. Regions has been known to litigate such claims, and depending on what state you live in, how much the property is worth relative to the mortgage balances, etc., you may be at risk of either foreclosure or a lawsuit for breach of contract. Please go get legal counseling before you make the assumption this is a settlement situation.

      • jham

        Thanks for the advice. I live in Florida. Can a second foreclose?

      • http://www.zipdebt.com/ Charles Phelan

        Yes, definitely. As far as I know, a second lien holder can foreclose in virtually all 50 states. They would just have to pay off the first mortgage before getting any remaining proceeds from the sale.

  • belugs

    have a situation where my father passed and my mom is living in the house. house is worth about $650k. 1st is with WF for $430k, and 2nd with BofA for $130k. Current on both notes. Since there is equity, what would happen if we stopped baying the 2nd? Would they foreclose.? We help our mom with the payments, and can continue paying the 1st, but the 2nd has become a struggle. Credit is not an issue, since my mom is now supported by me and my brother. My mom would like to continue living in the house, so we will make sure the 1st continues to get paid. Also, what if we stop paying the 2nd and keep the money that we would have paid to the 2nd aside, so just in case they threaten to foreclose, we can “catch up?” would they call in the whole note, or only what is in arrears? We would really like to settle the 2nd, as others have done. Your thoughts? We are located in CA.

    • http://www.zipdebt.com/ Charles Phelan

      Belugs, I would not recommend the settlement strategy with these numbers in play. If the home is worth $650k, then the total combined note balances on the first and second mortgages are fully covered, with $90k of equity to spare. If you stop paying the second, there is nothing blocking the lender from foreclosing on the property. Worse, a foreclosure could result in your mother losing her $90k equity above the $560k owed, because they will surely try to recover their costs from any net proceeds over and above the first/second loan payoff amounts. Depending on the APRs and loan structure, it may make more sense to think in terms of refinancing. The property does not yet meet the 80% LTV ratio test, but we are seeing rising property values in CA, so it may not be long before a traditional refi would be do-able.

      • belugs

        Unfortunately, the rates are low, it’s more of the struggle to make the payment :( If we did stop paying the 2nd and kept the payment aside, would we be allowed to catch up, or would/can they call in the note? A balloon payment of sorts. AT least we would still be covering our behinds, so to speak.. I guess what i am hoping is that i may be optimistic about the value of the house, and BofA would not want to pay off the first to foreclose,since they are in 2nd position, and settle because they don’t want to deal with it, nor take the risk of trying to get full value. Am I dreaming? Thx in advance!

      • http://www.zipdebt.com/ Charles Phelan

        Yes, you are totally dreaming, sorry. A normal action taken by lenders upon default is to “accelerate” the note, meaning they call it due in full. It’s usually possible to negotiate a forebearance agreement to catch-up the arrears and avoid foreclosure. But if you are having trouble making the payments, I’m not understanding how you will also be able to “keep the payments aside.” If you have that ability, then you’d be better off just continuing to pay the second mortgage per the contract.

        Again, if you are close in the $650k valuation, then there is $90k to spare, easily enough to cover the cost of foreclosure, and still leave 100% of the note balance for the first and second mortgages. What you are suggesting puts the $90k equity at risk. I would not recommend strategic default in this situation unless you were planning to just sell the home before they get around to foreclosing on you. Also, let me caution you that I’m quite sure any number of debt settlement firms would gladly tell you this second mortgage can be settled for 10 cents on the dollar, in order to grab what fees they can from you. Please don’t fall for any sales pitches, ok?

      • belugs

        Steve and Charles, thank you for your advice. To be up front with you, though the payment on the 2nd is a struggle, it would be more of a strategic default as i am helping my mom with that payment, and i sure could use it for my family! Obviously,. based on Charles’ advice, it wouldn’t be prudent to skip payments as they may accelerate the loan, instead of settling, so i guess i will have to continue making the payments. Thanks again for the insight.

      • http://GetOutOfDebt.org Steve Rhode

        Why not sell?

      • belugs

        my mom doesn’t want to leave the house:(

      • http://GetOutOfDebt.org Steve Rhode

        Desire and reality are not always the same.

        What we have here is a math problem wrapped in emotion.

        She might have to consider being proactive than reactive.

      • http://GetOutOfDebt.org Steve Rhode

        I hate to state the obvious but if you are struggling to make the payments and have that much equity, what about selling it and resizing your living expenses to fit within what you can afford?

  • DjonaM

    Northern VA. We are underwater by about 100K. We owe 500K on the first mortgage and another 70K on a line of credit with SLS, who recently bought the loan. We are current on both, don’t miss payments, and our credit is good, but we recently got wind of the fact that we could settle the line of credit.

    My husband found a company that claims they can settle it for us for 13K. I’d prefer to do it myself as they want an additional 1500 in fees, but I first want to know if this is even possible. Is it unlikely that SLS will even consider settling with us with no financial hardship?

    • http://www.zipdebt.com/ Charles Phelan

      DjonaM, before you consider settlement on the second mortgage, I recommend you speak with a local bankruptcy attorney about a lien-strip under Chapter 13. You should fully research the pros and cons before deciding on settlement as the right strategy. I realize that bankruptcy probably sounds drastic, given your situation, but settlement is essentially equivalent to Chapter 13 in terms of what it accomplishes, minus the protection of the court against creditor litigation. Your credit will take a serious hit, so you need to take that into consideration, as well as the potential tax impact of a mortgage settlement. Regarding financial hardship or the lack thereof, it is very difficult in most cases to reach a settlement with a mortgage lender while retaining ownership of the property, unless you are willing to provide financial disclosures. This often becomes a sticking point in the negotiations, and I’ve seen situations drag on for years where the client was unwilling to provide financials, or unable to document a legitimate financial hardship.

  • Crista

    We live in CA. In 2010 we charged off our 1st and 2nd mortgages in Chapter 7. At the time we were current on our mortgages but behind on other debts including medical bills. When my husband got laid off a year later we tried unsuccessfully to modify either our 1st or 2nd with BofA. During the negotiation our 1st was sold to another servicer who is currently working with us on a modification. We have not paid our 2nd in over 11 months and have heard nothing from BofA. We discovered that our home has major foundational problems which do not significantly affect our living here but would need to be disclosed in any sale and were not covered by insurance because they consider it earth movement/faulty workmanship. The problems are well documented by both our insurance company and the engineering firm we hired to figure out what was going on when we saw our walls cracking. In spite of this, we would like to stay in our home. We have recently gotten it appraised for $100,000 (well below market value due to the foundation). We owe $108,000 on our 1st and $112,000 on our HELOC wth BofA. We would like to submit a copy of the appraisal, engineering reports and insurance denial to BofA and see if they would settle for around $10,000 (all we have left in our IRAs) because we cannot make any more monthly payments. Do you think this would be a good place to start? What department should I send the offer to. Thank you!!!!

    • http://www.zipdebt.com/ Charles Phelan

      Crista, if you discharged your personal liability for the BOA HELOC via Chapter 7 bankruptcy, then they probably have the account in a suspended (i.e., no action) status. Technically, they are not supposed to speak further with you about this account due to the BK discharge, but of course they still have the lien against the property. You probably need to address your proposal to their recovery department, but I would call first and confirm which department is handling it, since you might need to grant them permission to speak with you (due to the discharge). Also, rather than starting with an offer to settle by raiding your IRA (and thereby incurring a tax problem too), I suggest you request full forgiveness of the $112k HELOC under the DOJ settlement. See the official website at NationalMortgageSettlement.com for basic information. It’s a long shot they will grant relief to you under the DOJ settlement, but I have seen others get their HELOCs 100% wiped out thereby. So it is a logical first place to start. Your request for forgiveness can include the documentation of the foundation problem and insurance denial — to convince them they have a lien worth zero at this point anyway. Hope that helps!

  • sd1

    My wife and I were in chapter 13 and converted to a 7 and were discharged in 2012. My home is worth about $390-400K. My first just modified us and our balance is now $266K. The 2nd mortgage is a line of credit that we are behind on and owe about $115+. Even if I sold the home at $390K after real estate there would be a shortage. I really would like to keep the home, but am having issue negotiating with the 2nd. They have made an offer that we simply cannot afford any further monthly outlay. A family member told me to offer that he would be willing to offer to buy the loan out for pennies on the dollar and hold a note. I am not sure how to present this or if it is even an option being the house is almost even. However, I understand that if the 2nd wants to foreclose, they must pay off the 1st and even at that it could cost them up to $60-70K to go through the foreclosure process. Is there a way of getting them to possibly accept 15-20 cents on the dollar?

    • http://www.zipdebt.com/ Charles Phelan

      SD1, at first glance this would not appear to be a settlement situation at 15-20%. If your home is worth $390k and you only owe $266k on the first mortgage, then the second mortgage is fully covered by equity. If you have already discharged any personal liability via Chapter 7 bankruptcy, then the lender only has recourse against the property itself via the lien. If they foreclose and the property sells for $390k or close to that, even after foreclosure costs they will still recover $60-70k or more, which is far greater than 15-20% of $115k.

  • MICHAEL

    1ST & 2nd entered with SunTrust to buy home as 80/20 in NC. 1st in foreclosure. House has 100K equity. House has offer to purchase, close 2nd week APR2013. I asked foreclosing atty for payoff amount. They only provided payoff on 1st. Called ST to get 2nd mort payoff so I can present to closing attorney. ST tells me 2nd has been “charged off” to LCS. AS I understand from reading your previous post answers,

    1. ST will still need to release the lein even though they sold the 2nd. correct?

    2. Do you think LCS debt will show due at closing or will closing amount only respresent the 1 loan (1st mort)?

    3. Any 2nd mort LCS setlement $ will only be available after or at closing.

    4. How do I get LCS settlement amount to be represented at closing?

    I would l like to discuss this further. Please advise how to make contact.

    • http://www.zipdebt.com/ Charles Phelan

      Michael, I’m replying here on the forum for the benefit of other readers. Will continue the discussion with you in reply to your email to me on this subject.

      I don’t believe ST sold the account, but rather assigned it to LCS Financial for recovery. Yes, the lien will still need to be satisfied before the sale can close. Closing by definition will require participation of the second lien holder, and the funds should be part of the existing escrow arrangement. If you have a notice or demand letter from LCS, you should be able to simply call LCS and request the payoff figure. If you don’t have anything in writing yet from LCS, get back in touch with ST and request the contact information.

      The main thing to understand here is that you are not in a settlement situation at all, but rather a traditional sale with full payoff of both balances. But ST has been handling this with the expectation that collection effort will be required to recover anything against the second lien. They should be elated to provide you with a payoff balance for release of the second lien.

  • Ann

    HELOC negotiation on Chapter 7 Bankruptcy; primary residence just now being foreclosed on 3 years after bankruptcy due to loss of jobs. How do I negotiate with the bank on HELOC or should I have bankruptcy attorney’s office do that for me?

    If we choose to pay off $11,500 HELOC but want to negotiate it down for a lump sum payoff should I try this with bank personally or get my bankruptcy attorney involved? This was attached to our primary residence which we kept paying on until we both lost our jobs last June and now property is being auctiioned in February.

    • http://www.zipdebt.com/ Charles Phelan

      Ann, you should definitely consult with your bankruptcy attorney before
      doing anything else pertaining to this HELOC. Find out if the HELOC balance was
      already included in the BK petition. If it was underwater at the time, perhaps
      your attorney included it for discharge of personal liability. A lot of times,
      people discharge their personal liability on an upside down second via Chapter
      7, then continue making payments to avoid foreclosure against the lien held by
      the lender (which can only be stripped under Ch. 13). If the house is going to
      foreclosure, and the HELOC was already discharged in your Ch. 7 case, you might
      not need to pay anything.

  • JaxUnicorn

    Thank you for such a wonderful article! I’m hoping it is OK to ask a question about a first mortgage – investment property in Florida serviced by GMAC. GMAC charged off the first mortgage balance of $102k (reported to credit bureau) over two years ago. Attempts to settle the debt were unsuccessful and GMAC told me they had “no intention of foreclosing”. Each month I would receive a standard form letter from their Recovery Department asking me to contact them about the debt. Now I’ve received a transfer of servicing letter – they’ve transferred the servicing to another lender, FCI Lender Services in Anaheim Hills, California and the “investor” is someone called Kajaine Capital (Kajaine Estates, LLC), a newly established LLC in Florida. Kajaine Capital has actually visited the property and illegally shared personal information about the status of the mortgage with my tenants. The original mortgage was taken out with Wachovia Mortgage Corporation with a Lender of Amnet Mortgage, Inc. and registered through MERS. I do not see any type of assignment recorded in the county clerks records either transferring the ownership of the mortgage to either FCI or Kajaine Capital.

    Does this sound like a “bad debt” sale? Should I attempt to settle the debt with this new company/investor? Could they actually foreclose?

    Thanks for any insight.

    • http://www.zipdebt.com/ Charles Phelan

      Yes, this does sound like a debt purchasing scenario. Yes, they could foreclose since they will have acquired all the rights associated with the original lien. Whether or not they would actually proceed against the property depends on a number of factors, mainly the home’s value. There would have to be enough recoverable equity after an auction sale that they could cover foreclosure costs and still make a profit on whatever they paid for the note acquisition. Foreclosure in FL is judicial only, so my best guess is that they would probably consider a settlement, since it would be a faster turnover on their funds invested. But first I would do some research in the local courts to see if this company has been litigating claims in court. You should determine how aggressive (or not) they tend to be before approaching them on a settlement. Also, I recommend you meet with 1-2 attorneys about this situation before you proceed — especially since the new creditor appears to have violated privacy rules, etc.

  • SeattleLK

    This article is great! I have a funny situation which is not causing me laughter these days. I foreclosed on a home in California (started 6/08 and ended 10/09). Bank of America got my loan and HELOC from Countrywide just before this. My credit is still reflecting the HELOC account with a balance of 26K, but it is charged-off. I’m currently in the middle of buying a home and the underwriter doesn’t like this balance, even though it has never gone into collections and is just showing a balance. My understanding is that since the loans were both owned by BofA and in California, I fall under the CCP580d exception to the exception and they can’t collect if I had a non-judicial foreclosure. In addition, the statute of limitations in CA is 4 years, which is up now. So my question is…would you still settle this HELOC with the bank even though the SOL is up and they can’t legally collect?

    • http://www.zipdebt.com/ Charles Phelan

      SeattleLK, I can see why you are not amused. Your situation proves one of the points I was trying to make in the original article, that lenders will treat an unsettled HELOC or second mortgage as a balance owed, which in turn will have a major effect on your debt-to-income ratio. This is a big reason I’m not a fan of the “wait out the SOL” approach. It may make sense for some consumers, but there are consequences, as demonstrated by your situation. I agree with your interpretation on CCP580d. If this was a non-judicial foreclosure, then the one-action rule has protected you from litigation on the HELOC, and now that you are past the SOL period anyway, CCP580d becomes something of a moot point. However, your problem is that the prospective lender for your new home is still counting the HELOC as a balance owed, simply because it’s appearing on your credit report, and will continue to appear for 7.5 years from the point of default. Lenders generally do not split hairs on whether or not a debt is collectible via legal means or past the SOL period. They consider it an unresolved obligation still owed, since expiration of the SOL does not actually remove the obligation itself. I assume they have the same attitude toward distinctions based on the one-action rule, etc.

      To your question, I would first attempt to get the lender to set aside the
      balance in their calculation of your debt-to-income ratio. It’s long odds they
      will agree, since underwriting standards are quite strict these days, but it’s
      still worth a shot. Try writing a detailed explanation including citations to
      the CA code that supports your case. If you don’t get anywhere that way, then
      yes, a settlement would make sense — as frustrating as that probably sounds to
      you. If you do attempt settlement, aim *very* low, since there is no path to
      recovery otherwise for the creditor. I once saw a similar situation where the
      HELOC was settled for about two cents on the dollar, although I’d expect 5-10%
      to be a more likely outcome.

      • SeatteLK

        Thank you for your advice. I have written a letter to underwriting explaining everything and we are hoping that works (had to deal with another reason they suspended the loan before sending stuff back to underwriting). I’m under 3 years away from the 7 years since the default, so my thought was to wait it out with the hope that I can get past this one hurdle with another bank. My debt/income ratio is not a problem at all in this case as I make plenty to cover it, I just don’t have 26K cash to pay it off right now. And my fear of settling is that I don’t want to re-start that 7.5 years. At least that is my understanding as to what would happen.

  • Sam

    I lost a house to a forclosure in Georgia, here are the facts, I would like your comments regarding collection the 2nd mortgate. The house was purchased with a first and second mortgate carried by the same lender. The 2 mortgages was then sold to TB&W. The property taxes were paid into escro but TB&W did not pay them to the county, TB&W subsequently went out of business.and the mortgages were sold to two different lenders. The new lender holding the 1st mortgage also defaulted on the property taxes which were still being paid into escro, this resulted in the sale of the lien on the court steps. The 1st & 2nd lender took no action to pay the taxes to have the lien withdrawn resulting in the property being forclosed by the purchaser of the lien. The house has subsequently sold and transfered to a new owner.

    Almost 3 years later the 2nd lender has contacted me and is now trying to collect on the deficiency. I would also like to mention that no appeal to the courst was made within the 30 day period after the date of forclosure. Does the 2nd lender have recourse to collect?

    • http://www.zipdebt.com/ Charles Phelan

      Sam, you should consult with a GA real estate attorney to confirm this, but my understanding is that lenders in your state must file for a deficiency within 30 days of the foreclosure sale date and follow the procedures specified in OCGA § 44-14-161, or the claim for a deficiency is barred. To my knowledge, it’s not illegal for them to attempt voluntary collection from you, but based on your description of events, I doubt they have a viable path to recovery via litigation.

  • Mike

    I did a short sale on my home in July 2011 and had a $25,000 Wells Fargo HELOC. They have refused to do anything as far as settle. The lowest I could get them down to was $18500. I havent had any communication with them in over a year and since my loan was sent to collections. So far nothing from the bank. Any advise on next steps. I consulted with an attorney and they informed me to do nothing.

    • http://www.zipdebt.com/ Charles Phelan

      Mike, if you haven’t had any communication in over a year then the situation is completely different now vs. your negotiation in 2011. You could probably negotiate a reasonable settlement now, assuming that you prefer to get the matter resolved so there is no potential for future liability. But first check to see if your state has anti-deficiency rules in the context of a short sale. In CA, for example, approved short sales after July 2011 are covered under an anti-deficiency statute that relieves consumers of further liability after the sale has been completed.

  • NECM

    I have not paid my 2nd mortgage in almost a year, my house is upside down we owe 400,000 it is worth about 320,00, i owe 110,000 on my second, can the 2nd foreclose me? I have gotten an advise from a lawyer he suggested to file a chapter 13 on my second and credit cards, I am struggling to make my 1st mortgage payments along with my other bills thats why its was suggested by the lawyer

    • http://www.zipdebt.com/ Charles Phelan

      NECM, there is no question that the second lender has the legal right to foreclose. However, the fact they have not done so after a year of non-payment is a good indication they don’t want to foreclose, simply because there is no recoverable equity and they would only add to their existing loss by foreclosing. Your attorney gave good advice, since an underwater second lien can be stripped under Chapter 13 bankruptcy. It may also be possible to settle with the second lender instead, as many others have done.

  • B Mac

    I’m currently delinquent on and trying to settle a HELOC and keep the home as primary residence. The bank is insisting on tax returns. Does anyone know if I need to send these in order to reach settlement?

    • http://www.zipdebt.com/ Charles Phelan

      B Mac, it’s difficult to reach a settlement with most lenders on a second/HELOC when you are staying in the property, unless you do submit financials. The general rule of thumb is that it’s ok to submit tax returns and other requested docs if they will support your explanation of financial hardship. Just be aware that lenders want this data to see if you otherwise have sufficient resources to service the HELOC with regular payments.

      • B Mac

        Thank you

  • Reggers95

    Mr. Phelan,

    I completed a short sale on my home 14 months ago in June 2011. The amount owed on my 2nd through Chase was $43,000 and after some negotiations they were paid $5,000 at closing. I received a 1099 on my first mortgage and the amount owed is showing zero on my credit reports.

    The 2nd mortgage shows a debt of $38,000 and lists it as ‘transferred to recovery’. My realtor advised to leave it alone as it has not gone to collections. Part of the reason I sold the home and moved into a small apartment was my job situation. I applied at Charles Schwab and went through 3 rounds of interviews. I found out today they will not hire me at this point because my credit report shows unresolved debt of $38,000. I explained to Charles Schwab that I completed a short sale after attempting to refinance or modify my loan without success. I have no other negative items on my credit and have never had a late payment in my life on anything. They informed me their hiring policy is very black and white on this.

    Although it is not in collections this is an item that is still impacting my life and preventing me from moving forward. What is a logical next step to resolve this? Contact Chase? Contact a lawyer? Wait? Not sure what to do but feel trapped.

    During the background/credit check portion of my interviewing with Charles Schwab they must have contacted Chase mortgage. I received a letter from Chase stating that they have been contacted by a third party and have verified that I have outstanding debt with them. I need to make this right however…I appreciate any direction you can give. I’ve never lost a job due to credit issues. Just need to think this through somehow…

    • http://www.zipdebt.com/ Charles Phelan

      Reggers95, I’m sorry to hear that this second mortgage deficiency has impacted you  to this extent. To me, it’s absurd that an employer would reject an applicant who took the responsible path and worked out a short sale.

      Let me ask you some questions so I have a better understanding of your situation. What state is the property in? When did you take out the second mortgage? Was it at the time you purchased the property originally? Or was this a HELOC taken at a later date? Did you sign a promissory note with Chase for the $38,000 deficiency in order to get approval to close escrow on the short sale? Please let me know on these key points, and then I’ll reply again with further input.

  • AA

    A debt buyer speaking at the AFCC Conference stated they are buying 2nd mortgage paper for under .05 and settling all day long.

    • http://GetOutOfDebt.org Steve Rhode

      I can see that being a wave right now.

      • Kelsey

        AA & Steve, if debt buyers are purchasing this paper for under .05, how much do you think they are willing to settle for?  What would make it worth their time?  .06, .07?  Obviously they’ll try to get the most they can, but what do you think is a good offer?

      • http://GetOutOfDebt.org Steve Rhode

        It really depends on what the individual owner feels they will take for it. As the owner they don’t have to settle. If they have all the documentation on the debt they could go ahead and sue.

        Remember that it is the settlements on some that create general profit. You can try for a 7% settlement but I would be utterly surprised if they accepted it.

        This is where the advice of a professional is helpful. You really need to know what the specific owner has been doing lately to have any expectation of what a general settlement percentage might be, if any.

      • AA

        I’d start at .15 and go no higher than .25 – but dont increase your counter offers too quickly.  Sit on the .20 for at least 4/5 months before increasing.

      • KTK

        Thank you both!
        My situation is such that I just went through a foreclosure recently. My 2nd mortgage has been charged off but not sold (yet anyway). I called them to settle and offered $3K (5% of a $60K balance). They said no but counter offered $15K (25%). I took this as a very good sign! Unfortunately I cannot come up with that kind of money and told them bankruptcy might be a better option for me. Also, I didn’t think it would be wise to accept their first offer! At this time I’m letting things sit (it was a few weeks ago). Any advice in this situation?  I’d prefer not to claim bankruptcy but prob would not want to go higher than 8-10% at the most. Others have advised me to just ignore this debt since there haven’t been lawsuits. I don’t want to have it hanging over my head though. (I also posted this question toward the top of this thread to C. Phelan.) This entire blog and thread has been helpful. Thank you.

      • Charles

         KTK, your starting offer at 5% was spot-on. I usually advise clients to start there, simply because in many short sale situations, the second lender will get a max of 6% anyway. The result will depend on the specific lender involved, what state the property is located in, whether or not it was a purchase money loan, recourse vs. non-recourse, and so on. FYI, I’m not a fan of the school that advises to just ignore charged off second mortgages until the SOL has lapsed — particularly if it is a recourse loan. For one thing, it will continue to skew your debt-to-income ratio until it’s resolved, and therefore affect your ability to obtain financing in the future. And of course there is the long-term risk of legal action on recourse loans. Just because we’re not seeing a lot of litigation activity in 2012, that doesn’t mean we won’t see escalated collection efforts on this type of account in the future. Anyway, take your time and be patient. Don’t be tempted to increase your offer right away. I suggest waiting a month or so to see if they come back to you with a better counter-offer. If not, you can go in writing with a proposal that repeats your prior offer. It’s a matter of continuing to bang on it until you get the desired outcome — which can take months in some cases.

      • Charles

        AA, for fully underwater second mortgages already past charge-off, there is no reason to start as high as 15%. In most cases, it’s fine to start much lower, around 5%, with the goal being to settle for 10-15%.

      • KTK

        Thank you for the great advice, Mr. Phelan! I will be patient.  The one thing that has me hoping to get this done soon is that if I could settle this in 2012, I wouldn’t have to pay taxes on the canceled debt per the mortgage debt relief act.  Apparently Obama has it in his budget proposal to extend this through 2015 but who knows if it will pass. Any insight on that?  I’m told both sides of the aisle like this, but nothing gets done in an election year!  Also, does anyone know what the SOL is in NH?  Some info I find says 3 years, others 6….
        Thanks again! 

      • http://GetOutOfDebt.org Steve Rhode

        KTK,

        If you need some expert assistance to deal with this for you consider visiting Charles at zipdebt.com

        It might be a smart move considering his experience.

  • Gary

    Very informative site

  • mike

    My home was foreclosed on 4 years ago. I had an agreed upon short sale with the first lender, and initially Bank of America agreed on the second HELOC. They then changed there mind and the property was foreclosed on. My credit report shows the HELOC as a charge off and has been serviced, not sold to a collection agency. My question is canI settle the HELOC on the second mortgage. I owe $59,000 and from reading below is 6% of that a good “agreement offer”.  Please help.

    • Kelsey

      Mike, I don’t see why you couldn’t settle.  I’d start even lower than 6% – start at 3-5% so you have something to work with?

  • Jharrismiami

    I Went through a bankruptcy in 2009 with the primary lender. I was sued on a second morts age 2 years later. I have settled with the second and am making monthly payments. Since I am settling that debt, am I credited with two foreclosures? Or since I am actively paying on the second, shouldn’t I only have the first foreclosure on my record? Thanks.

  • Luistrujilloesq

    Good advice… From Esq

  • Anonymous

    What if your only mortgage is the first, and it is upside down by 60%?  Bank of America has told us “no programs are available” despite months of discussions, because the property is an investment.   I have not seen much discussion about what is happening in recourse states when the first mortgages foreclose.  And I will worry for 6 years about losing my primary home…  Any advice?

    • http://www.zipdebt.com Charles Phelan

      Colorad, this is not a scenario for settlement of the mortgage, since defaulted payments would cause a foreclosure action. Loan modification is really the only “safe” strategy in this situation.

  • NewShoes

    This was a great read! Thank you. Great advice from Andy too. My assumption is that this advice is for those who are trying to keep their homes. Any words of wisdom on strategy for those would like to settle their second and foreclosure on the first? Is it best to settle the second before or after the first forecloses?

    • Charles

      If you’re going to allow the first lender to foreclose on the property, then it probably makes the most sense to just let the foreclosure go through before you do anything with the second. If the first lender finds a buyer for it, they might throw a bone to the second lender to get the second lien off, and then you would have an easier path to settlement on the deficiency for the second. I’m assuming you are totally upside down on the second, as discussed in the article.

  • KPP

    Another option is to review what programs are available in the state of residence as part of the Hardest Hit Funds, as some of them have second mortgage programs that will replace the existing one with a low or zero percent interest loan, which may not have any payments due for 10 years, and may be forgivable after a specified period of time. Obviously, this has more positive impact on credit reports.

    There are literally billions of dollars available. Contact the program administrators in your state:

    http://www.treasury.gov/initia

  • Anonymous

    Another option is to review what programs are available in the state of residence as part of the Hardest Hit Funds, as some of them have second mortgage programs that will replace the existing one with a low or zero percent interest loan, which may not have any payments due for 10 years, and may be forgivable after a specified period of time. Obviously, this has more positive impact on credit reports.

    There are literally billions of dollars available. Contact the program administrators in your state:

    http://www.treasury.gov/initiatives/financial-stability/housing-programs/hhf/Pages/default.aspx

  • Charles Phelan

    Great advice, Andy. Thanks for weighing in on the subject. I think 2nds are becoming more and more of a problem for consumers. I’m definitely seeing some people hesitate to make a decision one way or the other on a debt relief strategy, out of uncertainty over the outcome on a second mortgage. So people do need to understand that settlement is at least an option to be considered.

  • Charles Phelan

    Great advice, Andy. Thanks for weighing in on the subject. I think 2nds are becoming more and more of a problem for consumers. I’m definitely seeing some people hesitate to make a decision one way or the other on a debt relief strategy, out of uncertainty over the outcome on a second mortgage. So people do need to understand that settlement is at least an option to be considered.

    • KTK

      Mr. Phelan,
      Thank you for this great advice. I have gone through a foreclosure recently and have a 2nd mortgage out there. I want to be proactive in trying to settle it.  I recently called the bank and offered $3K (5%) on a $60K balance.  They said no but called back a couple of hours later with a counter offer of $15K (25%). I told them I did not have that kind of money and certainly couldn’t come up with it so my answer was no. I explained that it may make more sense for me to claim bankruptcy.  This was a few weeks ago and I’ve been just letting it sit.  I took their counter offer as a very good sign and I’m hopeful they’ll settle at a # I can afford. Do you have any advice on what my next step should be? Should I continue to let it sit (all still very new – the balance has been charged off, but the foreclosure was just a few months ago).  Or do you think I should call again with another offer?  Any advice is greatly appreciated!  

  • Andy Faria

    Great Information Mr Phelan. We have been very successful over the past couple years settling 2nd’s and HELOCs.
     
    When settled through a short sale, we find most 2nd’s will jump at 6%. It can be a little higher when the borrower is keeping the home or the first mtg is current, we’ve found around 10-20% to be the norm on those.

    A tip for those trying to settle a 2nd outside of a short sale: wait for the account to charge off or be sold off and always provide an overwhelming amount of proof that the home is underwater. We will use a recent appraisal or market analysis to show the market value. Basically, we have always handled them as if we are doing a short sale and will follow a very similar process, even if we’re not actually selling the home.

  • http://northeast-properties.com Andy Faria

    Great Information Mr Phelan. We have been very successful over the past couple years settling 2nd’s and HELOCs.
     
    When settled through a short sale, we find most 2nd’s will jump at 6%. It can be a little higher when the borrower is keeping the home or the first mtg is current, we’ve found around 10-20% to be the norm on those.

    A tip for those trying to settle a 2nd outside of a short sale: wait for the account to charge off or be sold off and always provide an overwhelming amount of proof that the home is underwater. We will use a recent appraisal or market analysis to show the market value. Basically, we have always handled them as if we are doing a short sale and will follow a very similar process, even if we’re not actually selling the home.  

    • livewithinyourmeans

      Sir, What you don’t talk about here are the people not institutions that are left holding the bag on judgements when these scum file bankruptcy or negotiate a small % owed. From the people who live with-in there means you are killing us with this advice. Great job!

      • joe

        DOUCHEBAG

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