How to Negotiate a Defaulted Second Mortgage Loan
In housing markets where home prices drop after a prolonged period of increase, many people who purchased their homes when the prices were at or near their highest levels can experience negative equity in their home, also known as being upside down. If the home has a second mortgage, the sum of the first and second mortgage balance may exceed the value of the home, making the second mortgage partially or completely unsecured. If you are in default on an unsecured second mortgage, you can attempt to negotiate a reduced payoff on the loan.
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Instructions
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Allow the second mortgage to go into default status if it has not already. A lender is not as willing to negotiate a payoff of a loan for less than what you owe, or negotiate any other favorable payoff arrangements, unless you are behind on the loan, casting doubts on your ability to pay the payments.
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Determine the value of your home using a professional real estate appraiser. Pay for a reliable appraisal, because it is difficult to negotiate with the bank without one. You may be able to have a qualified real estate broker render an opinion as to the value of the house that is acceptable to a lender.
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Verify that your home mortgages are in a negative equity situation. Add the balance of the first and second mortgages together and verify that this sum is greater than the value of the home. If the balance of the first mortgage is lower than the value of the home, but the total balance of the first and second mortgage is not, then you have a partially secured second mortgage. Negotiations should focus on the unsecured portion of the loan.
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Stockpile cash to negotiate a settlement of your second mortgage. A cash offer is tempting for the second mortgage company. It likely figures that it will not receive any money unless it settles the mortgage, but it will want cash when it does so.
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Contact the second mortgage company and make an offer. If you have an unsecured second mortgage, you may be able to offer just a percentage of the balance owed on the loan. If the loan has been in default for some time, the chances are better that the lender will take a smaller amount as settlement. Start with an offer of around 20 percent of the balance, and negotiate from there. When you negotiate a final amount, get the terms in writing. Ask for the lender to accept the offer as settlement in full and specify that no additional money will be due from the borrower.
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Tips & Warnings
If you are unsuccessful in negotiating a settlement of a defaulted second mortgage, a Chapter 13 bankruptcy may help. The bankruptcy court may allow you strip off any unsecured amount of the mortgage and pay that amount back with your other unsecured creditors, usually at a percentage of the actual amount. If your second mortgage is completely unsecured, the court may place the entire balance in with your unsecured loans to be paid at just a percentage of the balance and also eliminate the mortgage lien on your home.
If your second mortgage is completely secured by the value of the home, negotiations on the defaulted loan may be difficult. The lender would be better off to foreclose on your home, pay off the first mortgage holder and sell the home to recover its money.
