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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?
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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.
Refinancing the first still falls at the mercy and discretion of the 2nd lienholder. You could have full approval to take someone’s 1st mortgage rate down by 2 percent or more and lock them into a fixed rate, but if the 2nd decides that they do not want to subordinate with the CLTV at 100% or more, it puts the loan officer into a tough situation. I’ve seen this happen before, and even though eventually the 2nd lienholders agreed to the subordination, there was a sickening period where I thought the borrower would wind up out of luck because of a nonsense decision to not just stay where they are. It had to be explained to the 2nd in simple terms - you can either just stay where you are currently or watch this house get foreclosed on and get nothing, tell your investors that and it should make perfect sense.
well, that deal needed a good lox and a poker attitude.
sounds like common sense to me! how do you get the first approved with a cltv of 113% - don’t most first mtg investors that you deal with have cltv requirements too even if it is not their money?
So what do people with a first mortgage that is too high do if the value of their home is less than the combined first and second mortgages? Is re-financing still feasible? What other options should they explore?
There are opitons; many banks will lend 80-90 with a subordinated second. we’ll see more of that for full doc/good credit risks.
The HCLTV on a DU firs mortgage is maxed at 105. Also, when there is subordinate financing on a DU deal, the first is maxed at 80. Try to run a DU on this scenario right now and see what happens.
The idea of subordinating even when the CLTV/HCLTV is at a very high percentage and improving the borrower’s payment are very noble, but it won’t happen on conforming lending. It will be an ALT A or subprime deal that would probably have terms as bad as the current loan, and it would prolong the inevitable.
The fact of the matter is that there have been and will continue to be a high amount of foreclosures.
I am all in favor of exhausting all efforts to to help people avoid foreclosure, but the high CLTV suboridination will not help many of them.
Ouch…right off the bat i can think of four people in the same situation.
-Ian Mariano
There are very few Loan Officers who would even consider this course of action, and even have the stones to bring it up to the lender.
If the lenders on the 2nds agree to go for this, they really have nothing to lose. I’m surprised more people didn’t think of this. But it’s clear that the thinking folks are a distinct minority.
Good stuff Chris.
I have not run into this yet but I know it’s coming. If I was the second mortgage lender I would be happy to subordinate. I would love to hear more success stories and how it was negotiated.
I can think of two mortgage brokers in the same boat..
I believe the Senate proposal to allow FHA loans to $417,000 also allowed unlimited CLTV’s on top of FHA loans. Not yet law, though.