Tuesday, February 15, 2011, 08:28 PM
Posted by Administrator
Second mortgages here in South Florida are often worthless because ...since home prices have dropped... all of the equity in a house is eaten up by the first mortgage. It would be pointless for the bank or investors holding a second mortgage to foreclose because the end result of a foreclosure is a sale of the property auction.. by the Clerk of Court. And who would want to to bid?

The likelihood is that these second mortgages will be sold, one day, to debt collectors or lawyers in that end of the business for a few pennies on the dollar. The homeowner would one day get an offer that boiled down to: "You can't sell your house without taking care of the second mortgage which we now own...and which you haven't been paying. Give us $XXX in exchange for a Satisfaction of Mortgage and we'll call it even." $XXXX might be, for example, 20 cents on the dollar. On the other hand, no second mortgage holder is going to just walk away without trying to collect something.

So, of course, in the past two weeks I have had one client walk into my office with a foreclosure lawsuit filed by the bank that owns their second mortgage. They hadn't been paying the second in months...they also hadn't been paying their first mortgage. The principal balance on the first was far more than the value of the house. It made no sense that the second would foreclose..... but that is what was happening.

And, of course, as I should have expected, another client called me two days ago and reported that their second mortgage holder had sent them a 1099 tax form for the total amount due on the second mortgage. The 1099 meants that he had to recognize the forgiven debt as income on his 2010 taxes (unless he gets rid of the obligation by filing bankruptcy). The 1099 also meant that the second mortgagee was forgiving the second mortgage ....walking away.

I have been telling clients for a long time that that mortgagees don't know what they are going to do with the bad loans in their portfolios...that it will take a while for things to sort out.

Apparently, I was right.

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