Sneaky Seconds: How The Banks Grab Your Money As Your Property Value Rises

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( — August 24, 2015) — Predatory lending and inflated property appraisals reached their zenith between 2004 and 2008, saddling homeowners with record debt levels and triggering the foreclosure crisis that followed. In California, these unethical loans were called ‘80/20’ loans.

These financial sandtraps consisted of a first and second Deed of Trust. The latter, sometimes referred to as a Home Equity Line of Credit (HELOC), originated at the same time as the first Deed of Trust. These HELOCs were called ‘sneaky seconds’ for two reasons: the originator usually held them and their existence was hidden, making the trust (and its investors) that bought the first Deed believe that they were the only lien-holders.

When the amount of debt they carried began exceeding the value of their properties, many homeowners simply stopped paying on both their first and second mortgages. Others adjusted their firsts while leaving their seconds unpaid. They were able to do so because the lienholder would not be able to recoup the debt value on a sale and, therefore, did not foreclose. Essentially, the property no longer had enough worth to secure the amount owed.

That all changed when property values rebounded. Now those ‘sneaky seconds’ have the potential to cause borrowers serious financial hassle. Second lienholders are foreclosing on these newly ‘resecured’ properties, much to the surprise of those who didn’t even know how much value their homes regained.

Some borrowers mistakenly believe that their HELOC obligation was discharged by a Chapter 7 bankruptcy. While lenders can’t go after a homeowner for a personal judgement under such circumstances, they can still foreclose on the property if it regains enough value to re-secure the second lien.

Other borrowers think that mortgage debt has a statute of limitations or that the bank simply ‘forgot’ about the money owed. Therefore, they are stunned when the holder of their second lien forecloses upon them out of the blue.

According to Susan M. Murphy, founding member and head attorney at Advocate Legal in Los Angeles, debt purchasers who acquire these ‘sneaky seconds’ have no obligation to modify the terms or even advise the homeowners of foreclosure options. They are only required to send a Notice of Default and Notice of Trustee’s Sale. Many of them record these Notices but fail to send them out, which means that homeowners don’t realize they have been foreclosed upon until they receive a three-day Notice to Quit or the new owner knocks on the door.

The only way a lien can actually be stripped from a property is to have a lien release recorded with the county recorder or by declaring a Chapter Thirteen bankruptcy. In the latter situation, a second Deed of Trust that is not secured by the property’s value is stripped forever, even if the value later returns. If bankruptcy was not declared when your property value was low and the value has now come back in your property, it’s too late.  Now the debt has sprouted back to life like a chia pet and will need to be settled with the lienholder.

A lot of homeowners assume that a statute of limitations applies to mortgage debt, but in reality these debts can be called in any time during the loan’s duration, which is typically 30 years. Second liens can also be sold from one debt collector to another without informing the borrower. In many instances, the new beneficiary pays pennies on the dollar for these second mortgages, allowing them to acquire the property for a minimal investment.

Murphy recommends homeowners look closely at how much equity remains in their home and try to settle their second Deed of Trust with the lienholder before foreclosure starts. She has seen many cases where the lender considers a reduced payment: “If the property has to be sold to someone, it might as well be the original owner.”