STRATEGIC DEFAULT ANOMALY: Borrowers Continuing Payment on 2d Mortgage But Stopping on 1st Mortgage

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see Good Comments Below from Readers

Many thanks to Simon Johnson at www.baselinescenario.com for pointing out this apparent anomaly. While more and more people are exercising their option to strategically default on the first mortgage either intentionally or because they can’t make the payment, a rising number of second mortgages and HELOC’s are current relative to defaults on 1st mortgages.

I’ve confirmed Johnson’s observation but I can only offer conjecture at this point as to why this is the case. The number of contested issues relative to 1st mortgages is also rising sharply as people become more aware that they DO have defenses and even counterclaims. It might be that they are gambling on beating the 1st mortgage down in principal through settlement or getting rid of it altogether as an encumbrance on the property.

If the court’s agree with our analysis here, those mortgages are going to be declared unenforceable or even void as securing a non-existent obligation — the real obligation having escaped being committed to writing because the note contains so many discrepancies with the facts that it fails the test of being evidence of the obligation that arose when the borrower purchased or refinanced the home.A simple lawsuit to quiet title would raise this issue properly and during discovery it would be apparent whether the party claiming 1st position actually has anything to back up their position.

This would put the second lienholder in 1st position, and the strategy could be that that the borrower and the second lienholder might have a joinder of interests in maintaining the position that the 1st mortgage is void. The context of litigation would change to institution vs institution and those cases where the second lienholder challenged the 1st lienholder seem to indicate a willingness for even the highest courts in the land to simply apply the law without regard to politics — meaning the second lien-holder is winning these arguments.

The homeowner would be left with only one encumbrance on the home which now could be subject to the same challenges depending upon the facts. But the small size of the second lien might be enough for homeowners to accept those terms and execute any documents necessary to validate that mortgage and clear title without the necessity of a quiet title action. In a new world where bets against the interest you bought or sold became commonplace and profitable, this would make sense. But it is hard to see how so many homeowners would possess that level of sophistication.

I invite comments here.

OK Here is one from Joe that makes sense:

I wonder if this has something to do with the HAMP program. If the servicers are telling people that they have to stop paying their mortgage in order to be eligible for HAMP, and the mortgages at issue are mostly first mortgages, then you might be seeing people defaulting on the first mortgage for that reason. Since the homeowner is otherwise making payments on both mortgages, but only defaults on the first because of the advice of servicers, then that might explain the irrational move of defaulting on the first and not the second.

And here is another from Bob G.

Nope. Here’s the real deal. See the webcast below, especially the part where the nerdy female economist shows what’s really happening with the seconds vs the firsts. Bottom line: banks holding tens of billions of seconds on their balance sheets, and are screwing over the holders of the firsts, so as not to have to take the losses on the seconds. See for yourself. http://www.mortgagemag.com/news/2010/1016/1000021907070.htm

See also stuff at this link: http://www.securitiesdocket.com/2010/11/

And from Bruce from Oregon

With penalties and interest we are now about 27,000 behind on our first mortgage, but we are keeping our second mortgage less than 90 days delinquent. Our second mortgage HELOC with BOA is on a plan currently below 2%. As far as I know the loan is not securitized but held by BOA which has made concessions to help us stay current. The first mortgage is headed for a show down one day we know, but we have fended them off with forebearance and loan mod offers. When a notice of trustee sale, 43 identical copies of Notice of Trustee Sale were mailed certified mail to us, I wrote with a red sharpy on everyone “REFUSED FOR CAUSE” and attached a letter asserting that a modification agreement had already been reached between us and the servicer and that they had better check with them before they wrongfully foreclosed and became liable for damages. They rescidned the notices not once but twice.
Since then a letter to the servicer was sent saying that we are ready to cure the default as soon as they could provide documentation showing who the legally assigned owner of the note was. They had previously sent a copy of the note with no endorsements except an illegible stamp of some kind. We acknowledged that we still could not determine who the creditor is and please send us proper documentation so we can cure this default immediately. The servicer has not responded in over a month.
The funny thing is BOA is also the alleged trustee for the securitized MERS bundled up loan. So if BOA forecloses on the house for the 180K on the first, the 145K on the second will default, but if the first in unsecured by fraudulent mishandling, then they still get to keep the second without a fight.
We can afford to pay our second and since it is a line of credit, it may help us to rebuild our credit or at least give us a banking option since we no longer have credit cards or even a checking account.
BK is also in our future most likely, but the second mortgage may survive that as well.
Finally, in response to the question, why, it is easier to deal with one problem than with two since either encumbrance has right of sale in the contract.
Wish us luck, Still looking for the right lawyer.
Bruce

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