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Avoid foreclosure, eliminate the second mortgage
Is your house underwater?
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Tess Vigeland: I'll make an educated guess that we're gonna get some reaction to this next story. Anytime we feature a way for someone to get out from under a crushing debt burden, we get letters about how people should be responsible for their debts and should have to pay them. That said, this is about an element of the bankruptcy code that allows borrowers to discharge what's called a second, or "piggyback," mortgage. And it potentially allows those people to stay in their homes instead of losing them.
Marketplace's Jennifer Collins reports.
Jennifer Collins: There are signs of financial trouble all over Leif Madsen's house, a five-bedroom in a Denver suburb. There's not much furniture and...
Leif Madsen: Broken window from a flying toy, taped up right now.
The lawn has taken a beating from four kids with a football.
Kids shouting in the yard
Madsen: We've kind of neglected our yard. But that's because we were living with uncertainty for the past four years in the middle of this process.
That process began when Madsen lost his job in 2007, and then nearly lost his $300,000 home. He eventually filed for bankruptcy -- that let him keep the house while he worked out a payment plan for his debts. Under a little known provision in the bankruptcy code, Madsen may also be able to get out of paying his second mortgage.
Ike Shulman is co-founder of the National Association of Consumer Bankruptcy Attorneys.
Ike Shulman: For people who hear about it for the first time, it's like somebody just told them they can save their home.
I'll explain in a minute how Madsen may be able to wipe away a $30,000 second mortgage. But first, a reminder of how he and lots of other people got into trouble in the first place: During the housing boom, banks were doling out mortgages and credit for the asking. And millions of people bought homes they couldn't afford and then borrowed against them by taking out second mortgages or home equity lines of credit. It was easy because banks believed home values -- and home equity -- would keep rising.
Richard Green: Yeah, they were pretty dumb loans. Here we had an industry develop around people not having equity in their house.
That's Richard Green, director of the Lusk Center for Real Estate at the University of Southern California. We all know what happened next: The housing market crashed and people owed more than their houses were worth. Which brings us back to Madsen: He took out a $30,000 second mortgage to make the downpayment on his house -- meaning he went into debt for nearly the entire price of the home.
Madsen: When I signed off on the paperwork, I said, "Are we going to be able to do this?" 'Cause I really wasn't sure.
No, he wasn't able to. His adjustable-rate first mortgage -- which started out at $1,500 a month -- doubled. Meanwhile, the value of his house dropped 20 percent -- meaning there was no equity backing the second mortgage. Plus, he ran up $10,000 dollars in credit card debt trying to cover his bill while he was unemployed.
Madsen: Bankruptcy suddenly becomes the only realistic way to say, "I can get out of debt. I can suffer with my credit thing. And then I learn my lesson."
Under the bankruptcy code, home owners like Madsen can often work out a payment plan with the courts to pay pennies on the dollar for their debts. If a debtor sticks to the plan for three to five years, the second mortgage will be forgiven. As many as four million home owners may be able unload second mortgages if they file for bankruptcy. Many of them are completely unaware the option exists. Again, Richard Green.
Green: My guess is it's not widely known at all since until you told me about it, I didn't know about it.
Green says when a second mortgage is eliminated, banks are more inclined to modify the original loan. That could prevent foreclosures and help thousands of people stay in their homes. Bankruptcy lawyer Ike Shulman says he's helped home owners eliminate as much as $7.5 million of second mortgage debt in the past two years.
Shulman: The amount of debt relief that's out there and available to people who need it is enormous.
Leif Madsen and his wife are now two years into bankruptcy. Madsen has a new job. The bank has just finalized a modification on his first mortgage. He's paying $1,800 a month instead of $3,000.
Madsen: I have a lesson that will carry forever. Nut when my children come to this point, when they want to buy houses, the wisdom that we get from this will carry us forward.
As for Madsen and his wife they're not going anywhere. They plan to stay in the house they fought for forever.
I'm Jennifer Collins for Marketplace Money.
Vigeland: There are folks out there who can claim a big "Told ya so!" when it comes to the housing collapse. We've got a post from one of them on our Makin' Money blog.
Note to E Spells: I hired a reasonable bankruptcy attorney & renegotiated my first and second mortgages and eliminated my other unsecured debt. I did not abuse the system...
My debts (inlcuding the 2nd mortgage) are being paid as part of the bankruptcy settlement. It amazes me how this story got mis-interpreted!
Yes, Leif, I have been in dire financial situations in my life. However, instead of filing bankruptcy & paying a lot of money to a savvy & expensive bankruptcy attorney to "get out of my obligations", I hired a reasonable bankruptcy attorney & renegotiated my first and second mortgages and eliminated my other unsecured debt. I did not abuse the system and don't feel sorry for you or for other people in your situation. Now that you have eliminated your other debt, have you used this additional money to pay back the second mortgage? No, you didn't. The lack of sympathy that you are receiving is due to the fact that you used a savvy legal manuever to get out of paying a mortgage debt that you claim you would pay if you were able to. However, once you were able to pay it, you still didn't.
Not too much sympathy from the posters to this story... I understand the sentiment but I do wonder if the folks writing have ever been in a really tough financial situation - job loss combined with a bad mortgage deal. I did note I tried to negotiate honestly with the bankers but this went nowhere. Assessing my financial situation, had things gone normally and dealing with helpful, ethical bankers, I never would have had a problem at all! This, of course, was not the case.
A last note I would like to add is on the spiritual side: have you ever just "known" something? When my wife and I looked for a larger house for our growing family, when we found this one, we just "knew" it was the one. We had no idea of how rough the journey might become (the last years have been brutal) but the place is exactly where we are supposed to be, now & well into the future. Our fiscal lives are shaping up and we will be responsible citizens indeed as we continue along... I am still disgusted with the banking industry and how greedy it got (& lives harmed) but when this crisis gets fully past, perhaps all things will be better and that is my optomistic hope...
My problem is not with the banks. Yes, they robbed thousands of people, but the people they robbed were dumb enough to fall for it. Live within your means and purchase that of what you can afford. I'm a business owner and make about $150k a year with my small business and still, I would never purchase a house that costs $300k. It's financially irresponsible, especially if you have four young children.
As Tess noted in her lead into the story of Leif Madsen and his mortgage problems; I'll make an educated guess that we're gonna get some reaction to this next story. Anytime we feature a way for someone to get out from under a crushing debt burden, we get letters about how people should be responsible for their debts and should have to pay them. This statement is an admission by Marketplace that it is getting a little gun shy about not talking about peoples’ financial responsibilities, and how poor decisions can get them into trouble. Our current economic problems were caused in great measure because millions of Americans confused what they wanted with what they needed. The story of Leif Madsen is a good example. If the only way Mr. Madsen could afford to get into the house he bought was to take on an adjustable rate first mortgage and a second mortgage (to make the down payment) he should have walked from the deal, since he clearly could not afford it. I am sorry for the trouble he has gotten into, but its trouble that is largely of his own making.
I really wished that Marketplace would spend just a little bit of the time it gives to stories like this to talk about peoples’ obligation to make responsible financial decisions. A small sidebar on understanding how much house Madsen could afford would have gone a long way towards conveying what this story should have covered. Instead we got one more story about how, once having made a poor decision, consumers can wheedle their way out of their responsibilities (in this case paying off their second mortgage).
However sleazy the bankers were, and some of them may in fact belong in jail, the fact remains that the Madsens bought more house than they could afford. They suspected as much by their own admission. They took a gamble and lost. I don't believe that they should be punished forever, and maybe they have already suffered enough. However, like Rick T, I want to know where the bank will turn now to get its pound of flesh. Fannie Mae? i.e., the taxpayers? Somehow I doubt that the bank will just cheerfully absorb the loss.
As the subject of this story (and reading the above comment) I did want to clarify a couple things: when we bought the 300K house, the mortage folks REQUIRED us to take a 1st & 2nd mortgage, this was NOT an additional "take" to do random stuff. We were "assured" we would be able to refinance prior to the teaser-rate expiration (after 2 years of occupancy); basicly, the banks set us up, took as much money as they could (that interest-only deal) and then would have forced us out for a new victim had the market not collapsed. My feelings about financial services and how they are operating with no morality or humanity is the most disturbing thing I have ever faced. I also didn't declare bankruptcy to run away from debt; I would have gladly faced all opbligations I incurred if I was dealing with ethical business people - this was NOT the case. Loosing my employment and having a family of 6 (4 children, all under age 12 + my wife & myself) forced me to engage in every possible mode for basic survival. Having faith and perserverance allowed me to make it through a very dark chapter. If I never have to deal with financial services again (after this mortgage is paid-in-full) I won't. Anyone working with them now is basically facing evil directly. I know there are good folks who work in the industry and getting legal protection was essential for me because that was the only way any action happened either (3 attempts to submit paperwork to the bank for refinancing - bank "lost" things EVERY time UNTIL I engaged bankruptcy protection and legal representation. I'm happy my story made it to NPR & I do hope it helps other people but it is important to know, honorable people are suffering (me & my family) and this is not an "escape for the irresponsible" that the major media shills for corporate-controlled reality make it out to be...
Tess, you are absolutely right...this story got a reaction from me! Every time I hear a story like this I can only shake my head in frustration. My wife and I saved like mad to be able to make the down payment for our home. We carefully gauged our ability to comfortably pay for a traditional mortgage even if times were tough. A couple years ago a certain consulting company my wife was working for declared chapter 11 bankruptcy she lost her job and we were faced with that situation. Fortunately, instead of overextending ourselves we purchased a home well within our means and we continued to make our payments through her temporary loss of employment. Eventually my wife found a less paying job in a completely different albeit much more fulfilling field... There was no using unemployment... no COBRA (company went bankrupt therefore COBRA didn't apply..but that's a comment for a different story). My point is why is the American psyche now catering the lowest common denominator. Why are we in essence rewarding in my opinion bad behavior. I've said it before but why can't those who never default on their mortgage be given a break on there interest rates. When I made my student loan payments on time continuously for 3 years I was given a 0.25% interest rate drop. I was rewarded with an incentive to practice good financial sense. I would also like the story to expand on the implications of erasing all these second mortgages. With every "give" there has to be a "take" somewhere. Can someone please tell me where the banks will recoup there losses? Additionally, what are the implications for people who do declare bankruptcy and have their 2nd mortgages erased. What are the penalties for taking advantage of this program?
