If a house is seriously underwater, and the homeowner has a second mortgage or a home equity line of credit, he or she may be able to negotiate a mortgage settlement on the second one for a fraction of the cost. This sounds like a serious loss for the bank. Why would it consider allowing you to walk away from a second mortgage instead of enforcing payment? We can think of three reasons.
- Depending on how underwater your house is, the bank knows that your second mortgage may be dischargeable in bankruptcy because it’s no longer secured. If there is any equity in it, the lender will be unlikely to settle, so the key is to obtain an appraisal that shows the second mortgage is completely underwater and therefore unsecured.
- The lender will also lose everything if the borrower’s house ends up in foreclosure. Second mortgages mean the lender has no priority on the house, so the first mortgagee ends up gaining the house in foreclosure. The homeowner will end up dealing with the deficiency with the first lender, but it at least gets the house. The second lender gets nothing.
- By the time the lender’s mortgage is delinquent, it knows the borrower is in trouble, and it already suspects it will lose money. Lenders are very unlikely to agree to a Las Vegas mortgage settlement if the borrower is still current on his or her payments. The bank thinks borrowers will continue paying if it tells borrowers it won’t settle with them.
Even getting ten or fifteen cents on the dollar is worth the lender’s while if it means settling with a delinquent borrower. Once the equity is gone in a house, though, the loan is unsecured, meaning it can be fairly easily discharged in a Chapter 7 Las Vegas bankruptcy. If that happens, the bank gets nothing.
For more questions about bankruptcy in Las Vegas, please feel free to contact an experienced Haines & Krieger Las Vegas bankruptcy attorney for a free initial consultation by calling us at 702-880-5554.