Your First Mortgage is Too High. There’s a Second: What do you do?

Are you in the following boat? Do you know someone who is?

First mortgage is about to go up by 4% because it’s on an arm. 2nd mortgage is for a balance more than the home is worth. Let’s say you have a 250,000 house, you bought at the top of the market, the heady days of 2005. You ave a $200,000 interest only first with a rate of 4.9%; the second is a fixed, 30/15 program with a rate of 11%. This is typical 10% financing at the time, and a situation. The people bought planning to refinance, with the presumption that if even half the appreciation rate continued, everything would be fine in 2-3 years.

But now, that time is up.

And now, the mortgage rate is going to increase by 4% because even though the prime rate was better, the margin virtually guarantees that it will go up. And that $250,000 home? Now it’s worth 220%. You’re at 113% loan to value.

These Second Mortgages are no more secure than Credit Cards

These seconds are mostly “credit cards,” or “unsecured lines,” and Wells Fargo holds a ton of them. Their operational survival may depend on people’s willingness to continue to be obligated for a house that’s worth far less than what they owe. If there is a default, an average about 70% of the value of the house goes back to the lender. That’s present value, and that only covers the first. The second? S.O.L.

For that reason, subordinations are becoming more acceptable to second lien holders. A subordination is a process where you remortgage the first, and leave the second alone. It used to be that an appraisal was required, now lenders–such as GMAC, Wells Fargo, and Countrywide are stuck with millions and millions of unsecured second mortgages that are worth no more than the integrity of the borrowers who are increasingly willing to take a default on their mortgage.

So when someone has gone from 5% to 9% on their mortgage, increasing the payment on a $200,000 house 1600 a month, the second isn’t the problem–the first is. What consumers can do now is only refinance the first mortgage through subordination. A quality loan officer can make this work for you–almost regardless of the situation in about 2 weeks. You need to ask if they have done 10-20 of these subordinations before you go with them, and if they have, chances are, they can help you.

You take out a new first for 80-90% of the present value, and get it from 9 to 6.5-7.5. This makes it affordable, and the second lienholder is in no worse of a position than they were before.

The real question is this: Is it better or worse for them to agree to do this. The second leinholder won’t get anything either way. Still–are they better off agreeing to a subordination in the hopes that the buyer stays in the house?

—-

Finally–holiday cheer: A Midwestern guy moves to California to be an actor. He becomes a loan officer to make ends meet. This amused the heck out of me when I was looking for mortgage videos: NSFW: Ice to an eskimo.