Loophole in the Law for Second Mortgages

A new phenomenon is being seen in San Francisco primarily and it may be spreading quickly.  A way to get rid of your sencond mortgage…

The banks don’t like this at all, but it is working for some homeowners who say that the bank should never have made that loan much less sell it to multiple investors making it impossible to reduce the principal and nearly impossible to sell it short or get a loan modification.

Bankruptcy attorneys have successfully performed thousands of these cases in the Bay Area.  How do they work?

The homeowner files for personal bankruptcy, why?

Well, what happens is that they cannot eliminate the debt of a first mortgage but second mortgages are treated completely differently.  The second mortgage is put on hold and no payments are made while the homeowner completes a repayment plan for other debts, which takes about 3-5 years.  At that point the second mortgage is eliminated.

What?  The second mortgage is eliminated?  No way!  The mortgage you’re probably paying like 11% on….?

In one case, the bankruptcy’s attorney had a client with a home purchased at $621,000.00 and the value of the home had dropped to $367,000.  Her first mortgage was $489,000.00.  She petitioned the bank to”set aside” her $122,000.00 second mortgage (at a much higher interest rate than her first.)

The court granted her motion and after six years she has paid only on her first mortgage, paid off her other debts, and has no second mortgage.

There’s nothing the banking industry can do about this except change the law and that does not look too promising for them during this housing market.